Chinese equities are currently facing challenges due to tariff uncertainties and a lack of domestic stimulus. UBS analysts believe that these factors will dampen market sentiment in the near term.
The geopolitical tensions and macroeconomic volatility pose significant downside risks, leading UBS to maintain a "Neutral" stance on Chinese stocks. The rising uncertainties surrounding tariffs, especially after the recent U.S. elections, along with Beijing's tepid economic stimulus measures, are critical concerns for investors. The recent policy measures from China have focused more on addressing local government debt rather than stimulating the property or consumption sectors, which has disappointed market participants. This cautious approach from Beijing suggests a wait-and-see strategy regarding U.S. tariff policies, which could further worsen negative market sentiment. The limited scope of stimulus initiatives indicates that the Chinese government may prioritize stability over aggressive economic intervention, which could impact earnings and valuations in the short term.
Despite the challenges, UBS has identified potential opportunities in defensive sectors and select growth stocks. The firm recommends prioritizing defensive and high-yielding value sectors over growth-oriented stocks during this turbulent period. Sectors such as utilities and telecommunications, with average dividend yields exceeding Chinese government bond yields by 400 basis points, are seen as more resilient. On the growth front, companies like China Merchants Bank Co Ltd Class H are expected to outperform due to their strong retail franchises and attractive dividend yields. Internet giants like Alibaba and Tencent Holdings are also anticipated to benefit from advancements in e-commerce, artificial intelligence, and cloud services, although they remain vulnerable to geopolitical uncertainties.
UBS projects an 8.5% growth in earnings per share (EPS) for Chinese companies in 2025, but the outlook for 2026 appears more cautious due to ongoing macroeconomic uncertainties. The potential for slowdowns in earnings growth highlights the fragility of the current economic environment, where tariff-induced volatility and disappointing stimulus announcements could significantly impact corporate profitability. The limited exposure of Chinese companies to U.S. revenues, approximately 3%, may provide some cushion for earnings growth. However, the overall sentiment remains cautious, with investors closely monitoring developments in both domestic policy and international relations.
UBS highlights opportunities within the infrastructure and energy sectors. Companies like China Communications Construction are expected to benefit from infrastructure investment trusts (C-REITs), which could boost their earnings as the government focuses on enhancing infrastructure development. Energy giant CNOOC Ltd is also expected to benefit from higher oil prices and increased production volumes. The potential for recovery in the energy sector could provide a counterbalance to the challenges faced by other sectors.
While defensive sectors offer immediate stability, UBS believes that internet stocks present medium-term value due to their strong market positions and potential for stimulus-driven tailwinds. The resilience of these companies in the face of economic challenges underscores their importance in the broader market context. Investors are advised to consider the implications of ongoing geopolitical tensions and domestic policy decisions on their investment strategies. The interplay between defensive and growth-oriented sectors will be pivotal in shaping the performance of Chinese equities in the months ahead.