UBS is optimistic about continued gains in the Chinese stock market next year, with strategies focusing on "going global" and "anti-involution," while a "global AI stock correction" is the main risk.

UBS is optimistic about continued gains in the Chinese stock market next year, with strategies focusing on "going global" and "anti-involution," while a "global AI stock correction" is the main risk.

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After recording a strong performance in 2025, can the Chinese stock market "leap forward once again" in 2026?

According to Trading Wind Desk news, on November 17, UBS released its latest research report "2026 China Equities Strategy Outlook: Another Leap Forward?" stating that there is hope for the Chinese market to continue the positive momentum from 2025 into next year.

The bank forecasts the MSCI China Index will reach 100 points by the end of 2026, implying about a 14% upside from its closing price at the time of the report’s release. Meanwhile, the Hang Seng Index target is set at 23,000 points, with about 13% upside potential.

The report highlights that the drivers of the market in 2026 will differ from those in 2025. Although positive factors such as AI innovation, an accommodating policy environment, improving global economic growth, and capital inflows from domestic and foreign investors will continue, their boost to valuation multiples may be less than this year. The market focus will shift to substantial improvements in corporate profitability.

On the strategy front, UBS has made notable adjustments. The report says that since yields of high-dividend stocks have been compressed, the bank is removing such stocks from its recommended portfolio, instead increasing holdings in certain "going abroad" concept stocks. These companies have "demonstrated resilience in profits and earnings amid this year’s tariff uncertainties." At the same time, UBS remains optimistic about the internet, tech hardware, and broker sectors.

Despite an optimistic outlook, UBS also clearly points out key risks. The report emphasizes that "a correction in global AI-related stocks" is a potential main drag factor for China’s tech sector. However, analysts believe that given the lower correlation and more attractive valuations of China AI stocks versus global peers, the impact may be cushioned.

Profit growth becomes the key engine,UBS forecasts MSCI China to rise 14%

UBS’s positive view on the Chinese stock market in 2026 is fundamentally based on the logic that profit growth will replace valuation recovery as the main driver of market gains. The bank’s target of 100 points for the MSCI China index is "based on an expected 2026 PE ratio of 15.5 times and profit growth of 10%."

This forecast is underpinned by a series of core assumptions. First, on the profit front, UBS expects the 2026 revenue of MSCI China index constituents to grow by 5%, roughly in line with its nominal GDP growth forecast; earnings per share (EPS) growth is projected at 10%. This 10% increase will be driven not only by margin recovery due to "anti-involution" measures, but also by lower capital expenditure reducing depreciation and amortization expenses—UBS estimates this alone could contribute about 1 percentage point to MSCI China’s EPS growth.

Second, on the valuation side, UBS expects a 4% uplift. The drivers of this re-rating come mainly from three sources of inflow: domestic institutional investors, retail investors seeking higher returns due to a low interest rate environment, and overseas institutional investors seeking diversification and relatively cheap assets.

The report believes several positive factors in the current Chinese market will continue to support the market in 2026, including:

  1. Innovation: Particularly in artificial intelligence (AI), China is one of the few markets outside the US that offers a wide range of AI investment opportunities.
  2. Accommodative policy: Supporting policies for companies and capital markets will persist.
  3. Ample liquidity: Ongoing fiscal expansion and a loose monetary policy environment. UBS expects global economic growth to accelerate to 3.1% in 2026, with the US Federal Reserve cutting rates by 50 basis points and the People’s Bank of China possibly lowering rates by 20 basis points, jointly creating a favorable environment.
  4. Potential capital inflow: From onshore and offshore institutional investors.

UBS projects listed companies’ revenues to grow by 5% in 2026, in line with its nominal GDP growth forecast.

“Anti-involution” becomes a key to profits

Among the many driving factors, UBS especially emphasizes the positive impact of "anti-involution" on corporate profitability. The report notes that despite macroeconomic challenges, "anti-involution" measures aimed at curbing disorderly price competition are becoming a key factor for improving the profit outlook of companies.

The report observes "early signs" of price recovery in industries such as solar, lithium batteries, express delivery, and aviation. According to UBS quant analysis, if these "involution"-related industries can restore profit margins to half their historical average, it could "boost overall EPS for MSCI China by 3 percentage points."

The report believes that with more anti-involution policy guidance set to roll out in the next 1-2 years, normalization of industry profit margins and improved valuations will likely result in upside-biased returns.

“Going abroad” also becomes a new focus

While remaining positive on sectors like solar that benefit from "anti-involution" and global energy transition demand, the bank also stresses the need to focus on certain "going abroad" stocks that show resilient profits and earnings amid tariff uncertainties, particularly high-quality exporters with more than 40% of their revenue from overseas.

The reason is that yields of many high-dividend stocks have been compressed after years of gains—for example, "it’s no longer possible to find financial stocks that can offer a 6% or higher dividend yield."

In contrast, some high-quality exporters “accelerated revenue and profit growth in 2025, surpassing the overall market.” The report expects the global economy to speed up in 2026, offering a favorable macro backdrop for the “going abroad” strategy.

Tech stocks remain favored, but beware global AI correction risks

The tech and internet sectors remain among UBS's top picks for 2026. The report argues that China is "one of the few markets outside the US to offer such a wide range of investment opportunities," which is attractive to global investors seeking diversification. Moreover, Chinese AI stocks are still discounted relative to their US peers.

For A-shares and H-shares, UBS indicates no strong preference, but highlights the different drivers between them: H-shares are regarded as the “highest quality and cheapest” channel for exposure to China’s AI platforms and applications, benefiting from foreign investment and southbound capital inflows; while A-shares may enjoy more liquidity from retail inflows and potentially greater earnings boosts from “anti-involution.”

However, the report lists "a correction in global AI-related stocks" as a major downside risk for the Chinese market. UBS's analysis shows the market rebound since early 2025 has mainly been driven by AI themes and innovation, and a loss of global AI investment enthusiasm could mean a valuation pullback in China.

Nevertheless, UBS identifies three key mitigating factors:

  1. Chinese AI stocks are "less correlated to global tech stocks like the US" compared to Korea and other emerging markets.
  2. The "domestic substitution process in tech is unlikely to be affected by any global tech slowdown."
  3. "China tech stocks’ valuations are still lower than global peers."

Through scenario analysis, the report also suggests that under the worst-case "AI bust" scenario, market valuations could revert to levels seen before the AI boom in early 2025.

 

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The above content is from Trading Wind Desk.

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