UBS: In recent volatility, China equities need to shift from macro defense to alpha selection

Overview

This UBS China equity strategy report discusses alpha opportunities in China equities amid recent global energy shocks and market volatility. The report notes that the closure of the Strait of Hormuz has significantly increased the correlation between China equities and global equities, while the collapse of ceasefire talks has also moved the market closer to a downside scenario. However, the report also believes China's economic activity remains relatively orderly, investors are largely in a wait-and-see mode, and there are limited signs of forced selling. Therefore, the strategic focus is not simply to bet on the macro direction, but to identify stock opportunities through earnings revisions, share-price performance, valuation percentiles, earnings surprises, and high-conviction analyst lists.

Core views

The key views are as follows: first, even after the Strait reopens, energy prices may stay higher for longer, making energy independence an important non-binary investment theme. Second, renewable energy stocks may benefit, and if oil prices remain elevated, domestic oil and gas producers may also have upside. Third, consumer and real estate are moved back to underweight because higher inflation will limit room for further rate cuts. Fourth, the 4Q25 earnings season for Chinese listed companies was relatively muted; among MSCI China companies already reported, most came in below expectations, but nonferrous metals, healthcare, non-consumer hardware technology, and non-bank financials showed relatively stronger earnings momentum. Fifth, given the continued uncertainty in global energy markets, the model portfolio needs greater diversification.

Analysis framework

The report combines a top-down macro scenario analysis with a bottom-up stock selection approach: it first evaluates the energy shock, oil price path, global market linkage, and the resilience of China's economy, and then uses multiple stock-screening dimensions to identify alpha opportunities that are less tied to the global macro outcome. Screening dimensions include divergence between earnings forecast changes and share-price performance, one-month relative strength, position within historical valuation ranges, positive or negative earnings surprises expected by analysts, and high-conviction stocks from UBS sector analysts.

Methodology notes

• Valuation methodDCF, Gordon growth model, relative valuation

  Multi-method valuation framework

  The report discloses that it uses multiple valuation methods for covered Hong Kong and Mainland China stocks, including DCF models, Gordon growth models, and relative valuation based on multiples such as P/E, EV/EBITDA, and P/BV.

• Stock screeningearnings revision and price performance screen

  Divergence between earnings revisions and share-price performance

  The report screens for stocks with earnings estimate upgrades but falling share prices, as well as stocks with earnings estimate downgrades but rising share prices, in order to identify potential mispricings or risk exposures.

• Portfolio constructiondiversified model portfolio

  Diversified model portfolio

  Against the backdrop of high uncertainty in global energy markets, the report emphasizes that the model portfolio needs to include a broader mix of stocks to reduce dependence on any single global macro outcome.

Asset mapping & comparison

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

• China equity market

  Core coverage asset

  Strengths

  Economic activity remains orderly, Qingming consumption data showed some resilience, and there are as yet no clear signs of forced selling in the market.

  Weaknesses

  Correlation with global markets has risen, and the energy shock and external risks have increased the probability of a downside scenario.

  Comparison

  Compared with the historical correlation of about 0.6, the recent correlation with the MSCI AC World has risen to about 0.8.

  Risks

  Further oil price increases, a global equity pullback, a hard landing in real estate, capital outflows, and slow structural reform progress.

• Renewable energy stocks

  Beneficiary theme

  Strengths

  Energy independence is highlighted as a key investment theme, which may attract policy and capital attention.

  Weaknesses

  Sector returns may still be affected by earnings delivery, valuation, and global risk appetite.

  Comparison

  Compared with traditional consumer and real estate sectors, this theme benefits more directly from energy security.

  Risks

  Policy support falling short of expectations, intensifying competition, and declining project returns.

• Domestic oil and gas producers

  High-oil-price beneficiary asset

  Strengths

  If oil prices stay higher for longer, earnings and valuations could receive upside support.

  Weaknesses

  Share-price performance still depends on oil-price durability and the policy environment.

  Comparison

  The report estimates that the implied oil price in Chinese oil stocks is about US$65/barrel, below the global oil price forecast of US$90-100/barrel.

  Risks

  Oil prices falling back after the Strait of Hormuz reopens, or policy limits on upstream earnings transmission.

• Consumer and real estate

  Underweight theme

  Strengths

  Some consumer data still show resilience.

  Weaknesses

  Higher inflation limits room for further rate cuts, and real estate still faces hard-landing risk.

  Comparison

  The report explicitly moves consumer and real estate back to underweight, and takes a more cautious stance relative to energy-related themes.

  Risks

  Insufficient policy stimulus, weakening income expectations, and credit risk in the property chain.

• Nonferrous metals, healthcare, hardware technology, and non-bank financials

  Sectors with stronger earnings momentum

  Strengths

  The report believes these sectors had relatively the strongest earnings momentum during the 4Q25 earnings season.

  Weaknesses

  Some sectors may still be affected by cyclicality, valuation, and external-demand volatility.

  Comparison

  Compared with the overall 4Q25 earnings growth of only 6% for listed companies and roughly flat revenue, these sectors stood out more.

  Risks

  A reversal in earnings revisions, results below expectations, and changes in global demand or policy.

Key data

• Report date2026-04-15The front page is marked Global Research 15 April 2026.
• Correlation between China equities and MSCI AC Worldabout 0.6 to about 0.8The report says the one-month correlation rose from a historical average of about 0.6 to 0.8.
• Downside oil price assumptionUS$130/barrelIf the disruption in the Strait of Hormuz lasts until the end of April, the report assumes oil prices could peak at this level.
• Downside impact on the S&P 500down 10-12%The report uses this range as the global market risk assumption under the energy disruption scenario.
• Implied oil price for Chinese oil stocks vs global forecastUS$65/barrel vs US$90-100/barrelThe report estimates that the average implied oil price in Chinese oil stocks is about US$65/barrel, below UBS's global oil price forecast.
• 4Q25 earnings growth for Chinese listed companies+6% YoYRevenue was roughly flat.
• MSCI China reported coverage and below-expectation shareabout 70% reported, 67% below expectationsThe report says that as of then, about 70% of MSCI China companies had reported, and 67% were below expectations.
• Sectors with stronger earnings momentumNonferrous metals, healthcare, non-consumer hardware technology, non-bank financialsThe report considers these sectors to have the strongest relative earnings momentum in 4Q25.

Impact & implications

For investors, the implication is that China equities remain under pressure in the short term from the global energy shock and risk appetite, but investors are not limited to macro directional bets. A more actionable strategy is to avoid sectors such as consumer and real estate that are more constrained by inflation and interest rates, while screening for individual stocks through earnings momentum, valuation percentiles, and earnings surprises, and increasing portfolio diversification. Energy independence, renewable energy, and domestic oil and gas producers are the structural themes emphasized by the report.

Risks

• The Strait of Hormuz remains closed, keeping oil prices elevated or pushing them even higher.
• Global risk assets pull back; in the report's downside scenario, the S&P 500 could fall 10-12%.
• A hard landing in China's real estate market.
• A weaker renminbi leading to capital outflows.
• Slow structural reform progress.
• Policy responses fail to adequately address the above risks, or excessive stimulus increases government and SOE debt and weighs on economic transition.
• Higher inflation limits room for further rate cuts, pressuring interest-rate-sensitive sectors such as consumer and real estate.
• In 1Q26, the average income tax rate rose in some industries, especially those with high overseas exposure such as autos.

What to watch

• Whether the Strait of Hormuz reopens and whether the disruption lasts through the end of April.
• Whether oil prices stay in the US$90-100/barrel range or approach the downside assumption of US$130/barrel.
• Whether China's consumer and economic activity after Qingming continues to show resilience.
• Whether the Chinese market shifts from a wait-and-see stance to signs of forced selling.
• In the 1Q26 earnings season, whether analysts' expected positive or negative surprises are realized.
• Whether stocks with earnings estimate upgrades but falling share prices see valuation recovery.
• The follow-through performance of the underweight stance on consumer and real estate, and the allocation adjustments toward renewable energy and domestic oil and gas producers.