Asian equities lead in January

Asian equities have maintained the strong momentum from 2025, with the MSCI Asia Pacific Index rising 5.1% year-to-date (YTD). This outperformance versus US and European demonstrates renewed confidence in the region.

Korean have led by a significant margin, followed by Taiwan, Japan and Hong Kong. The Hang Seng Index has gained 4.4% YTD, briefly trading above 28,000 to reach its highest level since July 2021.

The offshore market has notably outperformed the onshore market, reflecting international investors' growing appetite for Chinese exposure.

Healthy sector rotation emerges

Perhaps the most encouraging development has been the change in sector leadership. The top three sectors have rotated from materials, healthcare and information technology last year to real estate, materials and industrials this year.

This broadening of the rally signals healthy market development rather than narrow, momentum-driven gains. In particular, real estate's emergence as the leading sector suggests investors are positioning for policy support and potential stabilisation in China's property market.

Figure 1: Hang Seng Index sector performance (2026 YTD vs. 2025)

On a stock level, Alibaba has been the largest contributor to index performance so far this year, benefiting from its cloud and AI business momentum. Insurance companies like China Life Insurance, Ping An and AIA surged as household deposits shifted from banks towards wealth management products amid declining deposit rates and weakening real estate appeal. Regulatory changes from late 2025 reducing risk capital requirements for long-term equity holdings further supported the sector.

On the contrary, a shift in deposit behaviour affected traditional banks like China Merchants Bank. Fierce price competition weighed heavily on food delivery platform Meituan and vehicle manufacturers BYD and Geely. Policy changes that ended the full electric vehicle purchase tax exemption in January 2026, with buyers now paying half the tax is further suppressing demands.

Figure 2: YTD top (left) and bottom (right) contributors to Hang Seng Index

Validating support factors from outlook

In our 2026 outlook, we identified several structural factors supporting Chinese equities. Government policies have progressed as anticipated, with reduced re-lending rates, lowered commercial mortgage down payments and extended appliances trade-in programmes. The authorities remain open to lowering the reserve requirement ratio and cutting the policy rate further if economic conditions warrant additional support.

Initial public offering (IPO) momentum from 2025 has continued strongly into 2026. As of 28 January, 12 companies listed on the mainboard and one on the GEM board in Hong Kong, raising HK$39.3 billion. Shanghai Biren Technology and Minimax have been blockbuster IPOs, surging 68% and 259% respectively since listing.

Over 300 companies await listing, with particular interest from AI and health tech industries. This revival in new economy listings demonstrates sustained confidence in Hong Kong's capital market role.

On the other hand, the potential from deposits is yet to be optimised. Chinese household deposits continue to grow steadily, reaching RMB167 trillion in December 2025. This represents year-on-year (YoY) growth of close to 10%, yet this capital remains largely untapped for equity investment. A mere 5% deployment of this deposit pool would equal 6% of total China equity market capitalisation, representing substantial dry powder that could flow into investment.

Domestic economy shows mixed signals

Consumer demand remains vulnerable, with retail sales growth decelerating from 1.3% YoY in November to 0.9% in December. On a monthly basis, retail sales actually contracted by 0.1%.

However, green shoots are emerging in business demand. Imports rose 5.7% YoY in December, the fastest pace since September, driven by tech-related equipment. Total imports for 2025 matched 2024 levels, suggesting stabilisation.

Property prices across 70 major cities continued to decline, with the rate of decline increasing from 2.4% YoY in November to 2.7% in December. The property sector remains a significant drag on economic recovery.

Encouragingly, the central government has reportedly stopped requiring property developers to submit the 'three red lines' monthly indicators. If confirmed, this would signal meaningful regulatory easing for the troubled property sector.

Key catalysts and outlook ahead

Government policies have driven stock market performance YTD and will continue to determine near-term direction. The next important event will be the Two Sessions, scheduled to commence on 4 March.

Key items to watch from the Two Sessions include the target for China's gross domestic product (GDP) growth, which was 5% in 2025. More clarity on consumption-boosting measures and support for selected sectors such as AI will be crucial for sustaining the rally.

Most companies will release 2025 full-year financial results between late February and mid-March. Strong earnings growth would provide fundamental justification for the market's recent gains and support further upside.

US-China relations represent another important variable, with President Trump scheduled to visit Beijing in April. The outcome of ongoing dialogue could significantly influence market sentiment and trade policy direction.

Early performance suggests our base case target of 28,300 for the Hang Seng Index by year-end 2026 is firmly on track. Should policy execution and corporate earnings continue to exceed expectations, opportunities may emerge to revise this target upwards as the year progresses.

Technical analysis reveals caution

The Hang Seng Index is currently at a high-stakes crossroads, hovering near its 20-day moving average after a sharp rejection from the 28,056 peak. While the broader recovery remains technically intact, the recent moving average convergence divergence (MACD) bearish crossover suggests the easy phase of the rally has paused. Traders should be cautious to a developing head and shoulders pattern; a failure to reclaim the 27,400 level could finalise the 'right shoulder', potentially triggering a slide toward the 26,264 neckline. A confirmed break below that support would shift the outlook from a healthy correction to a significant trend reversal. The recent high at 28,056 will provide resistance.

Figure 3: Hang Seng Index daily price chart

• The figures stated in this article are as of 2 February 2026 unless otherwise stated. Past performance is not a reliable indicator of future performance.