UBS Securities Asia indicates that Chinese stocks could see additional upside of 20% as rising inflation expectations translate into stronger corporate earnings. The firm's bottom-up survey of industry analysts reveals that a growing number of Chinese companies plan to raise prices this year due to increasing input costs, while signs of improvement in overcapacity conditions are emerging. Strategists note that a reflationary environment is likely to drive valuation reassessments and more robust earnings per share growth, potentially lifting the MSCI China Index by 20%. In a report released on Thursday, strategists led by James Wang stated that, amid price increases, "given low market expectations for reflation and light positioning in inflation-sensitive sectors such as consumer stocks, the potential stock price reaction is skewed to the upside." Following a tech-led rally that lost momentum this month, a reflationary backdrop may offer fresh impetus for Chinese equities. The MSCI China Index has declined 5% in February, erasing its year-to-date gains, after having surged 40% from its April low. The latest report reiterates UBS's optimistic stance on Chinese markets. In November of last year, the bank's analysts projected that the MSCI China Index would reach 100 points by the end of 2026. UBS upgraded the real estate and consumer staples sectors from underweight to neutral, while downgrading the software sector to underweight due to concerns over AI disruption risks and elevated valuations. James Wang pointed out that the decline in China's Producer Price Index has shown signs of narrowing, and corporate profitability is improving. He added that bond yields have also risen, indicating some investor anticipation of reflation. However, he cautioned that if companies are unable to raise prices due to sales pressures, earnings expectations could be revised downward, potentially leading to a 7–10% decline in Chinese equities. UBS strategists remarked, "The experience of Japanese equities in 2022 suggests that the best-performing sectors during reflation include materials, financials, and real estate." They noted that in China, given light investor positioning, certain consumer sectors may be among the early beneficiaries. It is worth noting that, driven by AI developments and favorable policies, other major international institutions are also optimistic about the prospects of Chinese equities. In early January, Goldman Sachs projected that the MSCI China Index would reach 100 points by the end of 2026, representing a 20% increase from its level at the end of 2025. The bank also forecast that the CSI 300 Index would rise 12% to 5,200 points in 2026. Goldman strategists indicated that returns from Chinese equities in 2026 will be primarily driven by improvements in corporate earnings. Supported by AI advancement, corporate overseas expansion, and anti-involution policies, earnings growth is expected to accelerate from 4% in 2025 to around 14% in 2026–2027.
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