The recent rally in Chinese equities still has legs as the ongoing two sessions have reinforced upbeat investor sentiment about the adoption of artificial intelligence leading to more capital inflow and further stock revaluations, said global asset managers and investment banks.

Meng Lei, China equity strategist at UBS Securities, said on Friday that he expects earnings of the CSI 300 Index components to increase by 6 percent this year, but the index's upside could be significantly higher as valuations recover amid portfolio inflows.

"Among emerging markets, only China has high-quality, open-source large AI models, naturally drawing foreign investors," Meng said, especially as US market volatility prompts global funds to seek alternatives.

This narrative has coincided with the government's higher strategic emphasis on the stock market. This year's Government Work Report has for the first time listed stabilizing the real estate and stock markets as part of the overall requirements, while vowing to encourage the entry of long — and medium-term capital into the capital markets.

Meng projected that in 2025, nearly 1.7 trillion yuan ($235.1 billion) in longterm institutional funds will enter the A-share market, including almost 1 trillion yuan from insurance funds, more than 590 billion yuan from mutual funds and about 120 billion yuan from social security funds.

Richard Tang, China strategist at Swiss financial group Julius Baer, said that the Government Work Report may have reinforced the bullish mood that already existed in the market.

While the A-share benchmark Shanghai Composite Index handed back 0.25 percent to 3372.55 points on Friday, it rose 0.53 percent on Wednesday when the report was delivered and another 1.17 percent on Thursday, ending the week 1.56 percent higher.

Hong Kong's Hang Seng Index, meanwhile, closed at 24231.3 points on Friday, up 5.62 percent this week.

"We expect the positive sentiment to broaden out to non-tech sectors, such as consumer," Tang said, pointing out that the growth momentum of the Chinese economy has improved following the policy pivot in September.

JPMorgan Asset Management (China) Co Ltd said in a report that China's stock market may experience a "Davis double play" — a phase where both valuation increases and corporate earnings improve — potentially driving the market into a favorable investment stage.

"The revaluation process of Chinese assets has only just begun and is far from over," the report said.

Goldman Sachs has also raised its 12-month target for the MSCI Emerging Markets Index by 3 percent to 1220, considering the recent increase in its MSCI China Index target on the AI adoption impact on fair value through higher profits, multiples and portfolio flows.

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