The 2026 market backdrop looks constructive, supported by ongoing diversification from US, renewed international institutional participation, a stabilizing Sino‑US relationship, and sustained interest in technology. That said, market focus has shifted toward profitability, cash flows and balance‑sheet strength rather than growth narratives alone.
AI, semiconductors, and emerging technologies such as autonomous driving and robotics should continue to be key areas of attention. Having said that, after the rally in 2025, valuations in some segments have become more demanding, so returns will depend more on company fundamentals than broad thematic stories.
AI: From growth story to profitability proof
Reality check: Following periods of high growth narratives, the market is shifting focus from top line growth potential to profitability and cash flows. Investors are now scrutinizing margin, capital expenditure and free cash flow, and the health of the balance sheet.
Who are better positioned? In our view, tech giants such as Alibaba (BABA US/9988 HK) and Tencent (700 HK) that are equipped with strong balance sheets and cash flows to support AI development are better positioned to ride on the trend.
AI margin improvement: Corporate adoption of AI that lifts operational efficiency and monetisation will be a key margin driver. As AI tooling becomes more cost‑effective, companies such as Tencent that deploy it to reduce costs or increase revenue per user effectively will show meaningful profitability improvement potential.
Power infrastructure: The power infrastructure theme has been gaining attention lately: large‑scale AI depends on reliable power and grid capacity, creating potential beneficiaries among battery, storage and integrated power providers — firms such as CATL (3750 HK) could benefit from that trend.
Internet: Gaming, travel, and e-commerce stabilization
In the internet space, online gaming and online travel should continue to see resilient momentum, benefiting Tencent and Trip.com.
Tencent: Tencent’s dominant online gaming business is resilient to economic slowdowns, supported by habitual spending, social mechanics, and diverse monetisation. Tencent is also actively monetising its massive WeChat user base, and ongoing AI enhancements across the ecosystem are improving user experience, accelerating content production, and unlocking new revenue streams.
Trip.com: Trip.com’s dominant market position in China’s oligopolistic OTA market, asset‑light business model, high margins, and resilient growth have placed it in a sweet spot of China’s internet sector.
E-commerce stabilization: E-commerce plays such as Alibaba might see alleviating margin pressure in coming quarters as price competition in online delivery and quick commerce gradually rationalizes.
Alibaba: Alibaba’s AI initiatives are gaining traction driven by the increasing popularity of its Qwen model, which supports accelerating AI revenue growth and strong user adoption. On the other hand, quick commerce-related losses might narrow gradually in coming quarters, mitigating potential moderating e-commerce growth due to soft consumer demand.
Semiconductors: State backing and pragmatic workarounds
Policy support: Beijing’s desire to build a sovereign chip industry has attracted investor attention. The reported RMB200–500bn financing package underlines policy support for domestic capacity and R&D.
Strategic localization: Selective restrictions of foreign chips and pressure on major firms to adopt domestic alternatives point to a long‑term effort to localise semiconductor supply chains.
Technological workaround: Technically, China’s leading fabs remain clustered around 14nm. But hardware limits have prompted a range of pragmatic strategies: development of N+ advanced nodes despite lower yields, advanced packaging, software and systems workarounds from mixture‑of‑experts models to low‑level compiler optimisation, and scale computing over single‑chip performance.
Growing listed universe: While many Chinese chip companies still list on the A‑share market, Hong Kong’s semiconductor universe is expanding. Historical flows have concentrated on big-cap names such as SMIC (981 HK) and Hua Hong Semiconductor (1347 HK), but recent H‑share entrants like Novosense (2676 HK) and Tianyu Semiconductor (2658 HK), along with planned listings from BirenTech and Omnivision, are broadening the sector’s universe in Hong Kong and offering more ways to access the chip value chain.
Autonomous driving: Opportunity across the value chain
The flurry of listings in 2025 has deepened Hong Kong’s autonomous driving supply‑chain universe — lidar and sensor specialists (Hesai, 2525 HK; RoboSense, 2498 HK), perception and chip designers (Horizon Robotics, 9660 HK; Black Sesame, 2533 HK) and end‑to‑end solution providers (Pony.ai, 2026 HK; WeRide, 800 HK) give investors more ways to express thematic exposure.
Having said that, adoption timelines and business models differ markedly across hardware, software and services, and financial positions are uneven.
Humanoid robotics: Early‑stage play
Humanoid robotics has attracted investor interest but remains at an early development stage. For standalone robot manufacturers such as UBTECH (9880 HK), commercial scale, unit economics and recurring revenue streams have yet to be proven. On the other hand, component suppliers offer an alternative entry point into the value chain.
This article is for information only and is not investment advice or a solicitation to buy or sell securities. This article does not constitute a “Personal Recommendation” or “Investment Advice” under UK FCA regulations. The author holds NO position in the securities mentioned. There is no warranty as to completeness or correctness. Please do your own due diligence or consult a licensed financial adviser. Investing in Asian markets involves significant risk. Please read the Full Disclaimer before acting on any information. Images created with the assistance of Gemini AI.
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