BCA upgrades MSCI China on attractive valuation compared to peers

Investing.com -- BCA Research has upgraded the MSCI China Index to overweight, pointing to attractive valuations and improved profitability among major internet platforms despite lingering macroeconomic headwinds.

This is the first time BCA has turned more constructive on Chinese equities in several years, noting that the sector has “broken out of long-term resistance levels” following a sharp rally.

“We are turning more constructive on Chinese internet stocks after several years of caution. We recommend going long offshore internet equities in absolute terms and upgrading MSCI China to overweight in a global equity portfolio,” strategists led by Jing Sima said in a note.

Valuations of offshore Chinese internet companies remain about 30% below their 10-year average, BCA notes, even after a 37% year-on-year rally. Sales growth has been modest, but leading platforms such as Tencent and Alibaba have improved margins and are expanding abroad.

On the other hand, domestic-facing e-commerce platforms remain pressured by fierce price competition that has eroded profitability. Beijing’s stimulus measures have so far been piecemeal, BCA said, but downside risks to household consumption are now more contained.

Compared with U.S. peers, Chinese firms still trade at a roughly 40% discount, BCA highlighted, justified by lower margins and weaker returns on equity. While U.S. companies have nearly doubled their earnings per share since 2021, Chinese counterparts are still struggling to regain their pre-2021 peak.

Even so, the research house sees structural shifts working in China’s favor. Internet companies are diversifying revenue through gaming, cloud services, and artificial intelligence. Tencent’s international gaming revenues surged 35% in the first half of 2025, while Alibaba Cloud’s overseas sales rose 26% in the second quarter.

AI adoption is also starting to deliver tangible benefits, with Alibaba posting eight consecutive quarters of triple-digit growth in AI-related product sales.

BCA strategists also pointed to a moderation in domestic regulatory and geopolitical risks, which had weighed heavily on valuations in recent years. They expect additional policy support measures in the months ahead to provide a floor for consumption and investor sentiment.

In terms of investment positioning, the team recommended going long the MSCI China Growth Index over the next 12 months, closing its long A-shares/short MSCI China trade for a profit, and trimming A-shares exposure to neutral within global equity portfolios.

They argued that offshore Chinese equities, with their heavier weighting in internet platforms, should outperform A-shares on a cyclical basis.

While near-term pullback risks are higher after a more than 30% year-to-date rally, BCA believes Chinese offshore internet stocks remain attractive on a 12-month horizon.