UBS believes “new shoots” are appearing in Chinese equities’ fundamentals, with short-term risks skewed to the upside

Overview

In this China equity strategy report, UBS argues that signs of fundamental improvement in China's equity market are increasing. On the macro side, GDP grew 5% year-on-year in 1Q26, exports rose 15% year-on-year, and industrial enterprise profits recovered to 15% year-on-year growth; on the bottom-up side, improvements were seen in corporate capex willingness, hotel and airline travel, online bank card spending, construction machinery sales, baijiu price increases, expected food-delivery platform losses, and sportswear guidance. The report believes that while Middle East geopolitical conflict still poses downside risks, China's relatively lower dependence on oil and gas, higher penetration of new energy vehicles and renewable energy, and potential recovery in inflation expectations could make Chinese equities more resilient than other regions.

Core views

The core view is that both China's A-shares and H-shares have upside opportunities over the next two months, but driven by different factors. A-shares are more likely to benefit from strong industrial profit growth and improving earnings among non-financial companies; H-shares, especially HSTECH, may benefit from easing internet regulatory uncertainty, slowing food-delivery competition, new AI model releases, EV demand support from high oil prices, and expectations of easing China-US relations. The report also emphasizes that MSCI China's valuation has become attractive again after overseas market rebounds, and foreign investors may still have light positions after reducing exposure to emerging markets around the Iran conflict. Therefore, if the conflict is resolved and fundamentals continue to improve, China's equity market may still have further upside.

Analysis framework

The report uses a strategy framework combining macro data, bottom-up corporate operating signals, valuation, fund flows, and sector preferences. The macro section focuses on GDP, exports, industrial profits, retail sales, high-frequency real estate sales, and PPI; the corporate section tracks capex, travel, consumer payments, construction machinery, baijiu prices, platform competition, and sportswear guidance; the market section combines MSCI China valuation, northbound flows, mutual fund positioning, and emerging market fund flows; and the sector allocation section lists the most and least preferred sectors and stocks via model portfolios.

Methodology notes

• Macro strategyMacro and earnings linkage analysis

  Uses industrial profits, PPI, exports, consumption, and high-frequency real estate data to assess revenue and earnings trends of listed companies.

  The report notes that earnings of A-share non-financial companies have historically been highly correlated with industrial enterprise profits, and PPI is also highly correlated with listed companies' revenue growth. Therefore, improving industrial profits and a narrowing PPI decline are viewed as leading signals of corporate earnings recovery.

• Bottom-up researchCorporate operating signal validation

  Uses feedback from companies and operating indicators across industries to verify whether macro improvement is transmitting to the corporate level.

  The report uses information such as automated company capex feedback, hotel RevPAR, domestic airfare prices, China Merchants Bank online debit and credit card transaction volumes, excavator and heavy truck sales, Moutai ex-factory prices, food-delivery platform loss guidance, and sportswear companies' revenue guidance.

• Valuation and fund flowsRelative valuation and positioning analysis

  Uses MSCI China relative to MSCI World valuation, mutual fund China equity positioning, and emerging market fund flows to assess market upside potential.

  The report believes MSCI China's relative valuation is about 0.5 standard deviations below its historical mean. Although foreign investors returned after outflows from emerging markets in February and March, positioning may still be low, and if geopolitical tensions ease, both valuation and positioning could support a rebound.

• Valuation methodsDCF, Gordon Growth Model, and relative valuation

  Uses multiple company valuation methods when covering Hong Kong-listed and mainland Chinese stocks.

  The report states that it uses DCF models, the Gordon Growth Model, and relative valuation multiples such as PE, EV/EBITDA, and P/BV for stocks in different industries.

Asset mapping & comparison

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

• A-shares

  Benefit from improving industrial profits and earnings recovery among non-financial companies

  Strengths

  Industrial enterprise profits recovered to 15% year-on-year growth, A-share non-financial company earnings have historically shown high correlation with industrial profits, and 1Q26 earnings are expected to be solid.

  Weaknesses

  Still affected by the sustainability of real estate recovery, weak PPI, and the progress of structural reforms.

  Comparison

  Compared with H-shares, A-shares' short-term drivers are more tilted toward earnings and the industrial cycle.

  Risks

  A hard landing in real estate, capital outflows caused by currency depreciation, excessive policy stimulus, or reforms falling short of expectations.

• H-shares and HSTECH

  Benefit from improving expectations around internet regulation, AI narratives, food-delivery competition, and China-US relations

  Strengths

  HSTECH is close to its pre-'DeepSeek moment' level in late January 2025. If the Trip.com antitrust probe is resolved, DeepSeek and Hunyuan models are released, and food-delivery competition eases, upside elasticity may be unlocked.

  Weaknesses

  More sensitive to technology narratives, regulatory expectations, and overseas risk appetite.

  Comparison

  Compared with A-shares, HSTECH's short-term drivers are more tilted toward valuation recovery, AI themes, and improving competitive dynamics among internet platforms.

  Risks

  Cooling AI narratives, regulatory outcomes falling short of expectations, intensifying platform competition, and renewed deterioration in China-US relations.

• MSCI China

  Represents the overall valuation and fund flow allocation opportunity in Chinese equities

  Strengths

  Its valuation versus MSCI World is about 0.5 standard deviations below the historical mean, foreign positioning may still be light, and improving fundamentals strengthen the basis for a rebound.

  Weaknesses

  The market remains constrained by external geopolitical conflict and global risk appetite.

  Comparison

  After recent rallies in the US and some Asian markets, Chinese equities have become relatively more attractive again on valuation.

  Risks

  A prolonged Iran conflict, rising energy and commodity prices squeezing corporate margins, and continued foreign outflows from emerging markets.

• AI technology hardware, power equipment, nonferrous metals

  Explicitly listed by UBS as among its most preferred directions

  Strengths

  Benefit from AI infrastructure, improving capex, electrification, new energy, and resource themes such as copper and gold.

  Weaknesses

  Valuations and earnings expectations are already high in some industries, making them sensitive to order delivery and commodity prices.

  Comparison

  Compared with construction, automakers, software, consumer, and real estate, the report assigns a higher allocation preference.

  Risks

  Slower AI capex, falling commodity prices, intensified competition, or earnings missing expectations.

• Energy and oil & gas-related assets

  Both a source of inflation and cost risk, and an allocation direction for selected stocks

  Strengths

  The report's model portfolio includes energy-related preferred names such as CNOOC, and high oil prices may also enhance the relative appeal of EV demand.

  Weaknesses

  Rising energy prices pressure margins for most companies.

  Comparison

  Compared with some regions, China's economy has lower dependence on oil and gas consumption and power generation, and higher renewable energy and EV penetration, so the impact may be smaller.

  Risks

  An escalation of the Iran conflict driving energy prices even higher, squeezing corporate profits and weakening market risk appetite.

Key data

• 1Q26 GDP year-on-year growth5%At the upper end of the government's annual target range.
• Exports year-on-year growth15%The report says export growth exceeded expectations.
• January-February 2026 industrial enterprise profit year-on-year growth15%The strongest growth since 2022.
• 1Q retail sales year-on-year growth2.4%Faster than 1.7% in 4Q.
• Hotel RevPAR year-on-year growth4%Reflecting some improvement in the travel sector.
• Domestic airfare price year-on-year growth22%Together with hotel RevPAR, this indicates a recovery in travel demand.
• Moutai ex-factory price adjustmentup 9%The first since October 2023.
• MSCI China 1Q26 reported sample overall revenue and earnings growthrevenue growth 16%, earnings growth 31%The table sample includes 36 companies, covering 100% of MSCI China weight.
• Revenue and earnings growth of non-SOE samplerevenue growth 28%, earnings growth 63%The report's table shows non-SOEs outperforming SOEs.
• MSCI China relative valuation0.5 standard deviations below historical meanThe report believes its valuation relative to MSCI World has become attractive again.

Impact & implications

The investment implication is that the short-term allocation appeal of China's equity market is rising. If improvements in macro and corporate fundamentals continue, while risks related to the Iran conflict or China-US relations ease, A-share earnings recovery and HSTECH valuation elasticity could become the main drivers of upside. At the portfolio level, the report recommends staying balanced against the backdrop of geopolitical conflict, while focusing on AI technology hardware, power equipment, copper and gold, brokerages, internet, and outbound expansion plays, and avoiding real estate, construction, automakers, software, and some consumer segments.

Risks

• The Iran conflict and related events in the Strait of Hormuz may still bring absolute downside risk to Chinese equities.
• Rising global energy and commodity prices may squeeze corporate margins over the next few quarters.
• A hard landing in the real estate market remains an important risk for Chinese equities. Although high-frequency sales data have improved sequentially, the sustainability of the recovery remains uncertain.
• Capital outflows related to RMB depreciation may hit the market.
• Slow progress in structural reforms may suppress long-term valuations.
• If policy fails to respond effectively to the above risks, or if excessive stimulus leads to rising debt, both could trigger market shocks.
• HSTECH is highly sensitive to AI narratives, platform competition, internet regulation, and expectations for China-US relations.

What to watch

• Whether the Iran conflict and risks related to the Strait of Hormuz ease.
• 1Q26 earnings releases for A-shares and MSCI China companies, especially whether non-financial company earnings continue the improving industrial profit trend.
• Whether the correlation between HSTECH and the US software index IGV US, as well as the AI narrative, continues to improve.
• Whether the Trip.com antitrust investigation is resolved, and whether food-delivery competition shows further signs of easing in quarterly results.
• Market reaction to China's internet and AI sectors following the release of new DeepSeek and Tencent Hunyuan models.
• Whether US President Trump’s planned mid-May visit to China brings signals of easing China-US relations or commercial cooperation.
• Whether the improvement in high-frequency real estate sales data can continue.
• Whether PPI continues to narrow its decline and drives nominal GDP and corporate revenue growth.