Investing.com -- Investor interest in China equities has surged recently, with sentiment significantly more constructive than at any point in the past two years, according to UBS.
"Over the past month, we have talked with dozens of investors based in APAC and Europe about China equities. Generally, their interest and sentiment toward China equities has improved significantly," UBS strategists noted.
The renewed confidence stems from China’s push for innovation—especially in AI—and a broad range of policy easing. Macro (BCBA:BMAm) discussions among investors have also pivoted toward short- and medium-term drivers, including consumption, property activity, and fiscal stimulus, rather than long-term structural issues.
In a Friday report, UBS highlighted the 10 most asked questions from its clients about the Chinese stock market.
1) Why has the A-share market underperformed the Hong Kong market year-to-date? As of mid-March, the CSI300 and Wind All A-shares indices had risen 1.9% and 6.5% respectively, trailing the MSCI China Index (23.4%) and Hang Seng TECH index (35.2%). UBS attributes this divergence to index composition and fund flows.
The A-share indices are heavy in financials, consumers and industrials, while Hong Kong benchmarks are skewed toward internet and tech sectors, which have outperformed amid AI enthusiasm and macro recovery signals. Moreover, weak new fund issuance in A-shares contrasts with robust southbound inflows to Hong Kong stocks, which totaled Rmb361.1bn year-to-date, up 345% year-over-year (YoY).
2) Can A-shares catch up by year-end? UBS strategists see the potential for A-shares to catch up. Over the past three years, the return gap between A-shares and Hong Kong stocks has averaged less than three percentage points annually.
The AH premium index has also dropped below its historical average."From the perspective of mean reversion, the A-shares returns could gradually narrow the gap with that of the Hong Kong stock market going forward," strategists led by Lei Meng said.
Moreover, they point to improving macro indicators—strong consumer demand during the Chinese New Year, resilient auto sales, and signs of stabilization in the property market—as supportive of sectors dominant in the A-share indices.
3) How much re-rating upside remains for A-shares? While A-share valuations have risen, the trailing price-to-earnings (P/E) ratio remains 7–8% below the averages seen in 2017 and 2021.
UBS expects CSI 300 earnings growth to improve from 1% in 2024E to 6% in 2025E. The bank sees room for further re-rating, particularly if long-term funds—supported by a government implementation plan—bring in substantial net inflows, which could reduce the equity risk premium.
Currently, A-shares trade at a 4% discount to MSCI EM (ex-China), well below the historical 22% premium.
4) What is the trend in earnings revisions? Consensus earnings estimates for CSI 300 in 2025 have been revised up by 1.3 percentage point (ppt) over the past month, largely driven by IT sector upgrades. Historically, revisions tend to change direction in April.
UBS notes that if estimates remain stable or trend upward around the Q1 reporting season, “the full-year earnings growth momentum could improve.”
"If consensus earnings are revised downwards in April 2025, we may need to revisit our baseline forecasts. Therefore, investors should monitor consensus estimate revisions for CSI 300 earnings growth over the next month or so," strategists added.
5) Has the strategic importance of A-shares increased? UBS believes so. Policy documents since 2024—including the “Nine-point guideline” and language from the recent Two Sessions—emphasize the role of the stock market in supporting national goals like wealth transfer, innovation, and common prosperity.
State-owned entities and retail investors now hold over 63% of A-share market cap, making equity performance politically and economically relevant.
"We note that the A-share market could serve as a new household wealth reservoir, especially in a property downturn. Meanwhile, we believe ’new quality productive forces’ and self-reliance cannot be fully developed without stronger financing support from the equity market," the report states.
6) What signs of recovery are visible in the property market? UBS sees clear stabilization in tier-1 and core tier-2 cities. Inventory levels have dropped below the 15-year average, land auction premiums are rising, and resale prices have stabilized since late 2024. These trends mirror the recovery pattern seen in the 2014–15 cycle.
7) What did the symposium on private enterprises signal? President Xi’s comments from last month reaffirmed support for the private sector, stating that the policy direction “cannot and will not be changed.”
UBS sees this as boosting corporate confidence, which could lead to higher capex, more hiring, and better wage growth—factors that could also reduce the equity risk premium.
8) How does UBS interpret sector policy cycles? UBS notes that sector policies in China follow a cyclical pattern of support and regulation. For example, the internet sector saw early policy tailwinds in 2014-15, which later evolved into a bubble. Later, Chinese regulators intervened to defuse the bubble and bring the market back to rationality.
Currently, UBS believes the government "will try to strike the right policy balance, but major policy changes could lead to volatility in the related A-share sectors."
"After the private enterprise symposium this year, we think policies are likely to skew towards a loose stance across sectors," the bank added.
9) What’s happening with capacity utilization across sectors? Utilization rates vary. Autos, grid equipment, wind power, and auto parts are showing improvement, while sectors like cement, construction machinery, and industrial robots remain below pre-Covid levels.
UBS forecasts a gradual recovery in some parts of the industrials sector over the next two to three years.
10) What is UBS’s current global equity market preference? UBS ranks Europe first, then China, with a conservative stance on U.S. equities. The bank recently upgraded Europe to overweight, citing political shifts, fiscal stimulus, and falling energy prices.
China remains the only overweight in emerging markets (EMs), as UBS notes that EM ex-China equities are more exposed to U.S. tariffs and generate a larger share of revenue from the U.S.
"The team believes that US equities could underperform European equities and EM equities in the next 1-3 months. They think that the S&P 500 may correct further to 5,300 points in the next 1-3 months, so it’s not yet time for bottom fishing," UBS strategists said.
"In fact, since the Nov 2024 U.S. election, U.S. economic research data has shown weakness, but the sluggish macro fundamentals are yet to be fully priced in, in their view," they added.