Could a deal between Presidents Trump and Xi spark a Chinese bull run?

As the political pendulum swings in the US, the relationship between Washington and Beijing is once again in flux. Under President Trump’s administration, there could be upside risk with a potential détente on the horizon, which could raise intriguing possibilities for investors eyeing the Chinese market.

China’s measured response to the recent US tariff hikes, the under-representation of the US national security lobby and President Trump’s deal-making instincts suggest a scenario where a new trade deal might be pursued by both parties. Key figures in President Trump’s inner circle also appear to be encouraging this path.

As ever, our focus as investors is on the potential market effects, and if such a deal materialises, the implications for Chinese equities could potentially be significant.

Could China be ready to outperform?

Chinese equities have suffered from structural and cyclical headwinds for years – a sluggish housing market, regulatory crackdown on private sectors and geopolitical tensions have all weighed heavily on investor sentiment. However, there are reasons to believe that a potential inflection point could be near:

• Underweight allocations: Global investors remain significantly under-allocated to Chinese equities even after the recent tech-driven rally, meaning even a modest shift in sentiment could potentially drive substantial inflows.
• Fiscal stimulus and policy support: Government financial policy has effectively remained benign since 2023. Since the policy pivot in September 2024, the government has been consistent in its focus on reviving growth. It became evident at the recent Two Sessions that the government is committed to counter-cyclical stimulus, including an enlarged fiscal deficit target, a higher quota of government bond issuance and targeted measures to support consumption and stabilise both the property and stock markets.
• Early signs of property troughing: A reduction of housing inventory, especially in top-tier cities, increased land premiums and stabilisation of second-hand property listings all suggest that the housing market is troughing. The four-year long downturn of the housing market was the main drag on the Chinese economy, and its stabilisation could play a significant role in reviving consumer sentiment. We also observe green shoots in China’s consumer sector, with multiple companies recently mentioning encouraging consumption trends and a better outlook for 2025.
• Potential earnings recovery: After ten years of flat equity earnings (much attributed to the earnings decline of the property sector) and recent concerns over deflation, earnings expectations have started to rise again. Efforts to address overcapacity and limit local protectionism could help improve profitability, while a growing trend in enhancing shareholder focus could potentially drive a recovery in return-on-equity (ROE) metrics.

At a time when US exceptionalism appears to be waning, we believe that the rest of the world, including China, could benefit from any market rotation, with investors potentially looking elsewhere for under-correlated risk asset exposure.

Even after the recent correction in US equities, the valuation spread between S&P 500 and non-US equities is still elevated. Non-US equities (MSCI All World ex US) have steadily derated over the past decade, resulting in a hefty 40% ‘discount’ versus US equities (S&P 500) until recently, have been just 10% in 2015.[1] Furthermore, with US dollar strength starting to unwind potentially, we believe this discount could narrow.

Is a deal between Presidents Trump and Xi on the horizon?

Even if it is thought to be a low-probability event, a potential trade deal between the US and is not one to be ignored in our view. Despite continued rhetoric from China, President Trump may ultimately prioritise a deal that benefits US business interests and encourage Chinese investment into the US as part of a bid to seek a stabilisation in external relationships.

Notably, recent reports suggest a potential meeting could take place between Presidents Trump and Xi as early as April, with discussions centring around trade, investment, and security cooperation. Such a meeting could potentially provide a major sentiment boost for investors. Of course, in addition to assessing President Trump’s intent, the market equally needs to understand whether China wants to strike a deal.

What can the US offer to make China compromise? China is clearly somewhat different from many other countries in that it has plenty of dry powder in its policy toolbox to help to mitigate the US tariff impact. It has also diversified its supply chain since the first trade war and expanded export markets beyond the US.

More importantly, the emergence of DeepSeek[2] has complicated the situation. China’s progress in AI has been underestimated – and the US now needs to reassess its strategy to contain and compete with China, and to assess what it has to offer in exchange for a deal.

A contrarian opportunity in Chinese equities?

For investors willing to take a contrarian view, this backdrop suggests that the case for Chinese equities is strengthening, with or without a deal between Presidents Trump and Xi. In our view, markets are not currently priced for a potential positive shift in geopolitics, and any realisation of that could therefore potentially provide a strong catalyst for a re-rating in Chinese markets.

China has endured a bruising economic cycle, yet history suggests that markets have the potential to rally sharply after prolonged downturns and periods of investor under-allocation. Furthermore, with most global equity investors still on the sidelines when it comes to Chinese equity exposure, those who position early may find themselves ahead of the curve.

Is this a turning point for China’s market? Significant risk remains, but the potential upside is not to be ignored.

 

Assumptions, opinions, and estimates are provided for illustrative purposes only. There is no guarantee that any forecasts made will come to pass.

[1] Source for all data: Bloomberg and L&G, as at March 2025.
[2] For illustrative purposes only. Reference to a particular security is on a historic basis and does not mean that the security is currently held or will be held within an L&G portfolio. The above information does not constitute a recommendation to buy or sell any security.