UBS Global Financial Markets China Head Fang Dongming stated that the bank continues to recommend an overweight position in Chinese stocks, pointing out that despite significant gains, current valuations, while slightly above their historical average, remain attractive relative to global markets. He acknowledged challenges in China's macroeconomy but noted that sectors related to innovation are still rising; therefore, as long as the innovation theme continues to drive momentum, it will lift the broader Chinese stock market. Fang highlighted that the biggest catalyst for Chinese stocks is policy, particularly stock market-specific policies, as the current policy support is unprecedented. Beyond ongoing accommodative measures, state-backed funds are providing support to the A-share market, and policies are also positively impacting the real economy and private enterprises. Looking ahead to 2026, Fang believes the market momentum seen in 2025 will persist, including on the liquidity front. He mentioned that foreign investor interest in Chinese stocks is increasing, and interactions with international investors reveal growing enthusiasm for the market. Typically, large-scale long-term capital makes allocation decisions at the start of the year, suggesting potential inflows into equity risk assets during the "strong opening" period. Regarding domestic capital, especially from institutional investors, Fang observed continued strengthening of positions in Chinese stocks, including from insurance funds and public mutual funds, as A-share trading volumes reflect active participation from retail investors. However, in the second half of the year, he expects investors will increasingly focus on the delivery of corporate earnings, as institutional investors believe that without further catalysts, future market gains will need to be driven by profit growth rather than pure valuation expansion. Consequently, July and August are seen as particularly critical, coinciding with the mid-year earnings reporting season. UBS forecasts 10% earnings growth for Chinese stocks this year, with an estimated 4% valuation uplift. Earnings per share growth is expected to come from share buybacks and margin improvements, with the latter benefiting from reduced capital expenditures, especially in oversupplied sectors like property and new energy, and the effects of "anti-involution" measures. UBS favors the AI investment theme. Fang pointed out that China's AI strategy emphasizes self-reliance and domestic substitution, leading to particular optimism for domestic AI hardware companies, such as semiconductor equipment manufacturers and leading internet giants. The bank is also positive on the energy storage business within the solar sector, as it stands to benefit from power shortages driven by global AI development. For Chinese stocks outside the AI theme, UBS prefers domestic brokerages, as A-share brokers saw profit growth of approximately 50% to 80% in the first three quarters of last year, yet their stock price performance has lagged these earnings gains. He added that companies with high overseas revenue and consumer stocks that underperformed last year could also see improved prospects this year.
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