China’s equity market has reappeared on global investors’ radar since 2025. Artificial intelligence was the dominant driver of the market, fueled by enthusiasm around China’s AI models, hardware supply chains, and infrastructure buildout. By contrast, consumer stocks remain broadly out of favor amid weak confidence and deflationary pressures. Yet, there is more than meets the eye: Spending patterns are shifting, giving rise to new growth narratives and unexpected winners, such as Pop Mart and bubble tea brands, while overlooked consumer opportunities continue to exist beyond the headline names.
Exhibit 1: AI-Fueled Technology Rallied, Consumers Lagged
AI in China: A Defining Theme, But Not a Consensus Position
China equity managers broadly agree that AI represents a structural growth driver. That said, the magnitude and form of AI exposure differ meaningfully across China equity portfolios. The average fund in the China equity Morningstar Category allocated around 10% to the technology sector as of end February 2026, modestly above the Morningstar China Target Market Exposure Index’s roughly 9%. Dispersion was more substantial at the strategy level, highlighting the different ways in which managers express AI convictions.
T. Rowe Price China Evolution Equity stood among the strategies with the highest allocation to the information technology sector as of February 2026. Portfolio manager Wenli Zheng sees hardware-linked segments offering greater earnings visibility and clearer business models at this stage of the AI investment cycle than model providers or application companies.
Howard Wang, Rebecca Jiang, and Simmy Qi of JPMorgan China favor AI enablers and infrastructure-linked companies, which they believe can benefit regardless of which models or platforms ultimately prevail.
By contrast, Louisa Lo, lead manager of Schroder ISF China Opportunities, has steered away from most AI‑related hardware companies, noting that valuations have become increasingly demanding. Instead, she has sought to gain AI exposure through internet platforms, where she believes monetization at the application layer, is likely to accelerate, while still offering a more attractive risk/reward profile.
China Consumer Plays: More Than Labubu and Bubble Tea
China consumer, on the other hand, has been a challenging area for many investors over the past few years. A notable theme emerging across many China equity portfolios’ consumer exposure is the rise of the country’s new consumption trends. Fund managers widely note that consumers are not simply curtailing spending but are reprioritizing expenditure toward products and services that emphasize emotional engagement, personalization, and affordability. These shifts in consumer behavior have allowed certain segments to grow faster even as headline consumption remains weak.
Nicholas Yeo, Elizabeth Kwik, and Bush Chu of abrdn All China Sustainable Equity have played the new consumption theme through Pop Mart, which had an overweighting position of over 4% in the portfolio as of February 2026.
Few China equity fund managers held meaningful positions in bubble tea names, reflecting concerns over fierce competition and low barriers to entry.
In fact, these well-known new consumption names tend to occupy only small positions, if at all, across most China equity portfolios. Instead, many fund managers prefer to capture the evolving consumer behavior through travel and leisure-related names. Martin Lau, lead manager of FSSA China Growth, has H World as his top bet within the consumer sector, believing the hotel-chain operator has a long growth runway as it benefits from rising travel demand and upgraded consumer preferences. The manager of Fidelity China Focus is also constructive on the tourism theme, particularly highlighting the spending power and travel demand from retirees, and has expressed his view through exposure to Macau gaming companies, citing their attractive valuations.
Exhibit 2: Fund Managers Prefer Travel and Leisure Plays to Capture Evolving Consumer Behavior
Traditional consumption, particularly within consumer staples, has been most affected by weak demand and persistent deflationary pressures. While the segment remains broadly out of favor, several fund managers see scope to uncover hidden gems that continue to exhibit pricing power and brand strength, with valuations that already reflect a high degree of pessimism.
Rather than waiting for a broad-based recovery or leaning on dominant themes, managers are taking advantage of market dispersions with a consistent bottom-up discipline, backing companies with clear earnings drivers, defensible business models, and valuations that better align with underlying fundamentals. For investors, this underscores that headline narratives can obscure underlying opportunities and risks, and that selecting portfolio managers with proven stock-picking skills, rather than those pursuing blanket thematic exposure, remains critical to generating superior returns over the longer term.
For the full report “China’s AI Boom, Consumer Bust?”, please visit: https://www.morningstar.com/business/insights/research/research/china-ai-consumer-2026
