In a surprising turn of events, UBS AG Group made a rare update call, causing its recommendation on a major Chinese stock index to overweight.
As of 2 pm ET, ETFs tracking Chinese stocks like the iShares China Large Cap ETF FXI it traded up 1.52%, KraneShares CIS China Internet ETF SPIDERWEB increased by 2.86% and iShares MSCI China ETF MCHI increased by 1.26%.
Chinese company stocks also share the optimism Holding company of the Alibaba group BABA BABAF increased by 2.65%, PDD holdings PDD up by 2.87%, Tencent Holdings ADR Czech Republic up by 3.51%, Li Auto Inc THERE up by 0.24%, XPeng XPEV up by 2.29%, NIO-ADR NIO up by 2.50% e JD.com JD up by 2.06%.
This move comes against a backdrop of lingering concerns about China’s real estate sector and broader macroeconomic concerns. However, Sunil Thirumalaiglobal emerging markets equity strategist at UBS, pointed to earnings resilience as a beacon of hope in an otherwise turbulent market.
Favorable factors highlighted by UBS to support the bullish outlook for Chinese stocks include:
- Interventions from state funds.
- Positive surprises for dividends and buybacks from local companies.
UBS downgraded Taiwan and South Korea markets to Neutral, citing high premiums in the technology sector, BNN Bloomberg reported. This reflects a broader shift among investors away from frothy valuations towards more stable growth opportunities.
According to Tirumalai, the underperformance of Chinese stocks can only be attributed to a “valuation collapse,” CNBC reported. She pointed out that the largest stocks in the Chinese index have maintained strong earnings and fundamentals, providing a solid foundation for future growth.
To this end, the KraneShares CIO Brendan AhernHe noted that his team’s perspective on China and emerging market fundamentals is different from the conventional one.
The firm believes sector dysfunction in emerging markets and Chinese indices is driving underperformance, particularly due to the large weight of value sectors. Conventional methods of index construction, while useful for financial analysis, pose challenges for forecasting.
Stocks with higher P/E ratios carry a disproportionately lower weight in earnings per share (EPS), leading to forecasting difficulties. As a result, movements in stocks with higher P/Es dominate the index’s performance, while EPS is affected more by stocks with lower P/Es.
In a recent exclusive interview with Benzinga, Henry GreeneKraneShares investment strategist pointed out, “the Chinese stock market has bottomed, indicating a potentially rare opportunity.”
We covered his insights here: EXCLUSIVE: ‘China’s stock market has bottomed, indicating a potentially rare opportunity,’ says investment strategist
Later, in another exclusive, with Benzinga, Ahern shared China’s “long-term trend to invest heavily in developing its own domestic chip capabilities and reduce dependence on foreign suppliers.”
The update appeared to be in line with KraneShares’ philosophy and outlook towards Chinese stocks.
Despite concerns over geopolitical tensions and regulatory uncertainties, Chinese stocks have shown signs of resilience, with both the MSCI China Index and the Hang Seng Index posting double-digit gains in recent months.
While risks remain, including intensifying geopolitical uncertainties, UBS’s upgrade underlined a growing sense of confidence in China’s economic recovery.
As investors navigate these uncertain times, UBS’s bold call serves as a reminder of the potential opportunities ahead in the Chinese market.
Read next: EXCLUSIVE: KraneShares CIO talks Intel and AMD as China seeks self-sufficiency in semiconductors
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