Investing.com-- Chinese equities are expected to face near-term headwinds as lingering tariff uncertainties and limited domestic stimulus dampen market sentiment, UBS analyst said in a note, but highlighted some potential in defensive sectors and key growth stocks.
UBS retained a "Neutral" stance on Chinese stocks, highlighting downside risks from ongoing geopolitical and macroeconomic volatility.
UBS analyst Eva Lee pointed to rising tariff uncertainty following the U.S. elections and Beijing’s lackluster economic stimulus as significant downside risks. China's recent measures, which focused on mitigating local government debt rather than boosting property or consumption sectors, have disappointed investors.
“The limited scope of stimulus indicates that Beijing may wait for greater clarity on U.S. tariff policies,” Lee said, adding that this cautious approach could negatively affect market sentiment in the near term.
Tariff-induced volatility and further disappointments in stimulus announcements could weigh heavily on Chinese earnings and valuations, the UBS analyst said. However, the limited U.S. revenue exposure of MSCI China constituents – approximately 3% – may cushion earnings growth, albeit modestly.
UBS prioritized defensive and high-yielding value sectors over growth-oriented stocks. Financials, utilities, and telecoms, with average dividend yields exceeding Chinese government bond yields by 400 basis points, are now seen as more resilient. Meanwhile, growth sectors, including Chinese internet companies, remain attractive for long-term investors but face vulnerability in the coming six months due to geopolitical uncertainty.
Stocks offering robust dividend yields, such as China Merchants Bank Co Ltd Class H (HK:3968), are expected to outperform. UBS sees potential in the bank’s strong retail franchise and dividend yield, describing its valuation as attractive.
Internet giants like Alibaba (NYSE:BABA) and Tencent Holdings (HK:0700) are expected to capitalize on growth in e-commerce, AI advancements, and cloud services. Meanwhile, industrial players such as China Communications Construction (HK:1800) could benefit from infrastructure Real Estate Investment Trusts (C-REITs).
Energy giant CNOOC Ltd (HK:0883) also features on UBS’s focus list, with expectations of higher oil prices and increased production volumes driving profitability.
“While defensive sectors offer immediate stability, internet stocks present medium-term value owing to their robust market position and potential stimulus-driven tailwinds,” Lee added.
Despite projecting 8.5% EPS growth for 2025, UBS warned of potential slowdowns in 2026 due to persistent macroeconomic uncertainties.