UBS: A-Share Gradual Bull Market Confirmed – Four Strategies to Capture Long-Term Opportunities

Overview

This report is the second installment of UBS’s series on China’s A-share 'gradual bull market,' focusing specifically on long-term position-holding strategies under this structural trend. The report argues that as the property market declines and risk-free rates fall, A-shares are progressively replacing real estate as the most important household wealth reservoir in China. Strong policy support for capital market development, combined with long-term institutional inflows and 'national team' stabilization efforts, has significantly reduced market volatility. Based on this outlook, UBS proposes four long-term holding strategies: buying during sharp market volatility, structurally overweighting growth-style sectors, closely tracking long-term capital flows (ETFs, insurance funds, private equity), and allocating to brokerage and insurance sectors that benefit directly from capital market expansion. UBS maintains its bullish stance on A-shares, expecting continued earnings recovery and sustained capital inflows to drive further upside.

Core views

Why a 'gradual bull market' is needed and its current progress: The report notes that against the backdrop of a prolonged property market downturn and declining risk-free rates (3Y/5Y fixed deposit rates have fallen to 1.25%/1.30%, and the 10-year government bond yield is around 1.8%), China urgently needs a new wealth reservoir to offset the negative wealth effect from real estate. A gradual bull market in A-shares can boost household asset income, repair balance sheets, support the development of 'new quality productive forces,' and facilitate state-owned enterprise (SOE) capital transfers to social security funds. Currently, state-owned entities and households together hold 57% of A-share market value, while major non-SOE shareholders account for 17%. Regulators are actively addressing the historical imbalance of 'prioritizing financing over investment.' In 2025, A-share investment-side activities (dividends + buybacks) exceeded fundraising by RMB 1.9 trillion. Market volatility has also been markedly reduced due to long-term capital inflows and national team interventions. Strategy 1: Buy during significant volatility. The report argues that short-term, irrational corrections triggered by macro or external shocks present buying opportunities for long-term investors within the gradual bull framework. Reviewing the four major corrections since 2024 (each involving a >10% drop within 20 trading days), the A-share market recovered its valuation in an average of just 22 trading days. Investors can identify irrational pullbacks using high-frequency indicators such as implied volatility, trading volume, and margin balances. Strategy 2: Structurally overweight growth. Growth-style outperformance correlates positively with market beta. During a gradual bull market, investors tend to chase high-beta growth stocks to capture alpha. The report particularly favors 'big tech' sectors aligned with China’s self-reliance and technological advancement strategy—electronics, telecommunications, computing, and defense. Applying industry lifecycle theory, the report notes that industries in the acceleration phase (transitioning from introduction to growth) typically command higher PEG valuations, and tech sectors are more likely to initiate a 'second growth curve' through innovation. Strategy 3: Track net inflows of long-term capital. ETFs, insurance funds, and private equity are the three main drivers of recent market inflows. ETF expansion benefits index-heavy industry leaders (analogous to how US 'Magnificent Seven' stocks benefited from ETF flows); falling bond yields push insurers toward high-dividend equities, indirectly lifting quality stocks; and private equity fund registrations surged 241% YoY in 2025, becoming a key force behind small/mid-cap and growth-style performance. Strategy 4: Invest in sectors benefiting from capital market development. Brokerages and insurers are direct beneficiaries. As market activity rises, brokerage commission and margin trading revenues grow—brokerage profits jumped 43% YoY in 2025. Insurers benefit on the investment side from rising equity markets, with profits growing over 20% annually in both 2024 and 2025. Additionally, dividend-paying insurance products have become more attractive, with new premium growth expected to achieve double-digit increases in 2026.

Analysis framework

The report combines macro-level contextual analysis with micro-level tactical recommendations. First, it establishes the strategic allocation value of A-shares by analyzing the shifting role of real estate versus equities in household wealth and the downward trend in risk-free rates. Second, it validates the 'buying on dips' strategy through historical backtesting (e.g., S&P 500 and A-share recovery patterns post-correction). On style selection, it integrates industry lifecycle theory with incremental capital flow analysis to justify the current overweight recommendation for growth sectors and specific industries. Finally, by examining the investment preferences of different long-term capital sources (ETFs, insurers, private funds), it derives concrete sector allocation guidance—ETFs favor large-cap leaders, insurers favor high-dividend stocks, and active funds favor small/mid-cap growth—and extends this to fundamental impacts on brokerages and insurers.

Methodology notes

• Industry/Sector Analysis FrameworkProduct life cycle

  Industry Lifecycle Theory

  The report divides industries into four stages: introduction, growth, maturity, and decline. It argues that industries in the accelerated growth phase (e.g., certain tech sectors) enjoy higher valuations (rising PEG) due to market expectations of future potential, whereas mature industries are valued more on market share and quality. This helps explain why identical earnings growth can lead to different stock performances across lifecycle stages.

• Quantitative/Factor/Portfolio TheoryBeta/alpha analysis

  Relationship Between Growth Style and Market Beta

  The report notes that growth stocks’ excess returns correlate positively with market beta. In rising markets (high-beta environments), investors chase high-beta growth stocks for alpha; in downturns, they shift to defensive plays. This logic underpins the recommendation to overweight growth during the upward phase of a 'gradual bull market.'

• Event Arbitrage & Behavioral Finance

  Incremental Capital Determines Market Style

  The report emphasizes that market style at any given time is shaped by the nature of dominant incremental capital. For example, leveraged funds drive small-caps, foreign capital drives blue chips, mutual funds drive compound earnings growth, and currently, ETFs, insurers, and private funds respectively favor large-cap leaders, high-dividend stocks, and small/mid-cap growth. Understanding capital sources helps anticipate style rotations.

• Industry/Sector Analysis FrameworkSupply-demand framework

  Wealth Reservoir Substitution Effect

  From a macro supply-demand perspective, the report argues that as real estate’s role as a wealth reservoir weakens (due to shrinking supply/falling prices), massive household savings require new investment channels (demand side), making equities the primary destination for this capital—and thus forming the foundation of a 'gradual bull market.'

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Electronics, Telecommunications, Computing, Defense Sectors

  Beneficiary

  Strengths

  Aligned with national tech self-reliance strategy; in growth phase or at the start of a 'second growth curve'; enjoy valuation premium

  Comparison

  Higher growth potential and policy certainty compared to traditional cyclical stocks

  Risks

  Valuation de-rating if commercialization of technologies falls short of expectations

• Brokerage Sector

  Beneficiary

  Strengths

  Directly benefits from rising trading volumes and margin balances; 2025 profit growth reached 43%

  Comparison

  Higher sensitivity to market activity than other financial subsectors

  Risks

  Decline in market trading activity

• Insurance Sector

  Beneficiary

  Strengths

  Investment-side benefits from equity market gains; liability-side sees enhanced appeal of dividend-linked products; new premiums expected to grow double digits in 2026

  Comparison

  Combines high-dividend characteristics with growth potential

  Risks

  Persistent decline in long-end rates affecting reinvestment returns

• Industry Leaders (ETF Heavyweights)

  Beneficiary

  Strengths

  Benefit from passive inflows driven by ETF expansion; enjoy enhanced liquidity premium

  Comparison

  Preferred by long-term, stable capital over small/mid-caps

• High-Dividend Assets

  Beneficiary

  Strengths

  Benefit from insurer allocation demand in a low-rate environment; offer defensiveness and stable returns

  Comparison

  Clear relative advantage in a falling interest rate cycle

Key data

• Combined State-Owned & Household Ownership57%Combined share of total A-share market value held by state-owned legal persons and households
• Market Value Held by Major Non-SOE ShareholdersRMB 19.6 trillionAs of Q1 2026, representing 17% of total A-share market value
• 2025 Investment-Side Surplus Over FundraisingRMB 1.9 trillionDividends + buybacks minus fundraising amount, marking a reversal of the 'financing-over-investment' imbalance
• National Team ETF Net PurchasesOver RMB 1 trillionEstimated total purchases of broad-based ETFs by Central Huijin and other 'national team' entities in 2024–2025
• Q1 2026 Earnings Growth for Non-Financial A-Share Firms11.8%YoY acceleration, indicating sustainable earnings recovery
• 2025 Brokerage Profit Growth43%Significant YoY increase, driven by heightened market activity
• 2024–2025 Insurance Sector Profit Growth>20%Maintained above 20% YoY growth for two consecutive years
• YoY Growth in Registered Private Securities Fund Scale241%2025 YoY increase, reflecting accelerated private capital entry into equities

Impact & implications

The report views the A-share 'gradual bull market' not merely as a market phenomenon but as a strategic outcome of China’s economic transformation and household wealth reallocation. For investors, this necessitates moving beyond the traditional 'short bull, long bear' mindset and building confidence in long-term holdings. Specific implications include: tech-growth sectors will continue receiving policy and capital support, potentially leading to valuation re-rating; high-dividend assets will enjoy downside support due to insurer demand; and brokerages and insurers—as 'shovel sellers' of capital market development—will see strong earnings elasticity during active market periods. Additionally, lower volatility will enhance A-shares’ appeal to long-term overseas capital.

Risks

• Hard landing in the real estate market
• Capital outflows triggered by currency depreciation
• Slow progress in structural reforms
• Overly stimulative policies potentially hindering the transition to a consumption-driven economy and increasing government/SOE debt

What to watch

• High-frequency volatility indicators: implied volatility, daily trading volume, margin balances and their ratios, ETF turnover
• Net inflow trends and preference shifts of ETFs, insurance funds, and private equity
• PPI trends and industrial enterprise profit growth
• Household asset reallocation progress and new active mutual fund issuance