China and Southeast Asia Poised to Lead Asian Equities in 2026

China and Southeast Asian equities are set to outperform Asia’s markets in 2026, supported by improving liquidity conditions, tighter industrial discipline, and a clear policy pivot toward reform, according to a recent Deutsche Bank strategy note. Analysts believe these factors could help restore investor confidence and drive stronger equity returns across the region.

Deutsche Bank expects China to remain in a sustained “bull upcycle,” with market performance underpinned by three main drivers. First, although global liquidity growth is no longer accelerating, China continues to benefit from residual domestic liquidity support. Elevated household bank deposits mean there is significant potential for funds to rotate into equities as the opportunity cost of holding cash declines. Second, corporate profitability is expected to improve as years of aggressive capacity expansion give way to greater investment discipline, helping margins stabilize across key industries. Third, a shift in political priorities toward consumption-led growth and structural reform is likely to further bolster market sentiment.

Additional tailwinds are expected from industrial policy initiatives and government directives aimed at shortening payment cycles by state-owned enterprises. These measures could ease cash flow pressures for companies and improve overall corporate confidence. Deutsche Bank also highlighted the importance of so-called “anti-involution” policies, which seek to reduce excessive competition and chronic oversupply. Early signs of these policies are emerging across several sectors, potentially setting the stage for healthier profit growth after prolonged overcapacity.

Looking ahead to 2026, analysts anticipate a broader political pivot toward reform and greater economic “opening up.” Increased emphasis on boosting consumption, investing in human capital, and easing regulatory pressure is expected to feature prominently in government work plans and the upcoming 15th Five-Year Plan, reinforcing a more market-friendly environment.

From a global allocation perspective, Deutsche Bank notes that international investors remain significantly underweight China. The bank estimates that even a one-percentage-point reallocation by major global funds could translate into approximately $270 billion in equity inflows. Combined with global fiscal easing and potential interest rate cuts, these inflows could push Chinese and Hong Kong equities beyond previous market peaks.

Overall, Deutsche Bank favors China, select anti-involution sectors, and Southeast Asian markets, while maintaining a cautious stance on certain high-tech industries that may face renewed supply pressures.