After Goldman Sachs and Morgan Stanley, JPMorgan Chase also bullish on the Chinese stock market: In the second quarter, "take a step back, take two steps forward"!

At the end of the first quarter, the performance of Chinese technology stocks experienced a pullback, but overseas investment banks have continuously expressed optimism about the performance of A-shares in the second quarter.

On March 26, following Goldman Sachs and Morgan Stanley, JPMorgan Chase also predicted that the Chinese stock market is expected to see more fundamental-driven increases. JPMorgan's research report stated that it is optimistic about the Chinese stock market, believing that after four years of adjustment, various fundamentals are gradually improving, with AI technology empowerment and consumption recovery becoming new growth drivers. In the second quarter, A-shares are expected to "take one step back and two steps forward"—in the early part of the second quarter, the market may face some pressure or uncertainty, leading to a certain pullback or consolidation in stock prices. However, as the market digests some negative factors and capital inflows increase, the market is expected to continue to rise after the adjustment in the second quarter.

JPMorgan analysts detailed four major positive points in the research report: relative profit growth advantage within Asia, DeepSeek's empowerment to reduce costs and increase efficiency, stabilization of the real estate market, and improved liquidity supporting A-share allocation. However, JPMorgan stated that investors still need to be wary of risk factors such as U.S. trade policies and macroeconomic conditions.

At the same time, JPMorgan raised the target prices for MSCI China, the Hang Seng Index, and the CSI 300 Index, and recommended strategic allocation in areas such as artificial intelligence, high-end consumption, quality real estate companies, and healthcare.

One of the Four Major Advantages: Relative Profit Growth Advantage within Asia

JPMorgan pointed out that against the backdrop of increasing uncertainty in U.S. policies, the Chinese stock market has become a relative highlight in the region due to policy improvements, a rebound in the profit cycle, and reasonable valuation levels.

In addition, JPMorgan's data shows that among the Asia-Pacific region, the profit expectations for Chinese companies have been raised since the beginning of this year, and the stock market performance has also correspondingly led.

The research report pointed out that with expectations of a rebound in the business cycle and efficiency improvements and demand creation brought by artificial intelligence, the profits of Chinese companies are expected to further improve.

One of the Four Major Advantages: DeepSeek's Empowerment to Reduce Costs and Increase Efficiency

JPMorgan highly recognizes the technological changes brought by DeepSeek, believing that one direct benefit of DeepSeek is its ability to analyze a large amount of domain data, identify cost savings, sources of costs, and inefficient links, thereby expanding profit margins.

As early as mid-February at JPMorgan's China Opportunities Forum, almost all non-tech companies added DeepSeek to their local networks, with the initial goal of optimizing costs, improving efficiency and productivity, and a more futuristic goal of identifying new business scenarios.

DeepSeek has been widely deployed among Chinese companies, bringing significant cost savings and optimizing customer experience. JPMorgan provided three practical cases:

• Kingdee International has used DeepSeek to help make decisions to reduce programming staff by 10-15%.
• Before DeepSeek, Yum China achieved a year-on-year decrease of 90 basis points in labor costs through artificial intelligence in the fourth quarter of 2024. At Yum China, artificial intelligence monitors food preparation and handles over 150,000 consumer calls daily, achieving a success rate of 90%.
• TAL Education launched an intelligent learning tablet in 2023 that uses an artificial intelligence system to transform learning into an interactive and engaging experience.

According to JPMorgan Chase, a 100 basis point increase in net profit margin could lead to a 21% year-on-year growth in MSCI China’s earnings per share by 2025.

Four Major Benefits Part Three: Real Estate Market Stabilization Improves Consumer Confidence

JPMorgan Chase's research report points out that there is still debate about whether a broader economic recovery will drive up real estate/financial/consumer assets. However, if proven correct, this would give investors a reason for trend trading. At the same time, JPMorgan Chase emphasizes the recovery of the Chinese real estate market:

• After four years of adjustment, the ratio of the value of the Chinese real estate market to GDP has fallen to 1.9 times, down from about 2.0 times in the first half of the 2010s.

• The unadjusted average housing price to household income ratio has also dropped to 6.1 times, an unprecedented low in Chinese history.

• Among 100 key cities, 21 cities have an inventory-to-sales ratio below 14 months, which is considered a healthy level by the industry.

The stabilization of the real estate market also helps improve consumer data:

• In January-February 2025, the total retail sales of consumer goods increased by 4.0% year-on-year, better than Bloomberg's consensus expectation of 3.8%, and higher than December 2024's 3.7%.
• The ratio of household debt to disposable income is beginning to normalize, and housing affordability in lower-tier cities has improved, aiding consumption recovery.

Four Major Benefits Final: Improved Liquidity Supports A-Share Allocation

According to JPMorgan Chase, based on EPFR data, as of the end of February 2025, active funds' allocation to Chinese stocks is below the MSCI benchmark weight.

• So far this year, inflows into offshore passive funds have driven overall net inflows, accounting for 119% of total net inflows.
• Meanwhile, inflows into offshore active funds have been -19% JPMorgan Chase estimates that with the weakening of the US dollar, accelerated earnings growth, and improved liquidity conditions, inflows into offshore active funds may increase, and the Chinese stock market is expected to welcome a new round of gains after experiencing the current pullback. It is anticipated that every increase of 50 basis points in allocation to China will lead to a net inflow of USD 82 billion (CNY 592 billion).

At the same time, JPMorgan Chase analysts have raised the target prices for various indices:

• MSCI China (MXCN): Raised the bear/benchmark/bull target prices from HKD 58/67/76 to HKD 70/80/89.
• MSCI Hong Kong (MXHK): Raised the bear/benchmark/bull target prices from 9,500/10,700/11,800 points to 10,300/11,600/12,400 points.
• CSI 300 (CSI300): Adjusted the bear/benchmark/bull target prices from 3,600/4,200/4,700 points to 3,800/4,150/4,420 points.

Potential Risk Points

JPMorgan Chase highlights that adjustments to US tariffs and trade policies are worth monitoring, as market expectations of related changes may affect trade costs and confidence.

Therefore, investors need to pay attention to the impact of changes in the external trade environment on macroeconomic data for March and April, although China's economic growth is still expected to remain within a reasonable range.

Additionally, in the context of strong monetary policy support for the market, investors should observe the liquidity performance in the interbank market