UBS: Investors love contrast in China

Outlook of global wealth manager shows Chinese stocks among most preferred

With various uncertainties continuing to cloud the global economy, the clear path of China's economic recovery has provided investors with a key growth opportunity and upside potential in the country's stock markets, a global wealth management giant said on Wednesday.

UBS Global Wealth Management said in its mid-year Asia investment outlook that the Chinese market is one of its most preferred stock markets, as the MSCI China Index－covering about 85 percent of the China equity universe－is expected to grow by between 7 percent and 10 percent in the base-case scenario.

Hu Yifan, regional chief investment officer and head of macroeconomics for Asia-Pacific at UBS Global Wealth Management, said the index has started to outperform global peers, a trend that may continue in the second half.

The main reason behind UBS 'upbeat tone is China's distinct trend of economic recovery, said Hu. "It's certain China's economy will recover in the second half. The only question is how big the recovery will be. This marks a difference from many other economies that are plagued with downward pressures."

Data from index provider MSCI showed the MSCI China Index, denominated in the US dollar, achieved gross return of 1.19 percent in May, compared with 0.19 percent of the MSCI ACWI Index, a global equity index.

Hu said the global economy may face mounting uncertainties in the rest of the year as the US economy has a 40 percent chance of achieving a soft landing but also a 30 percent chance of experiencing a sharp fall in both growth and the currently elevated levels of inflation.

In contrast, China's economy will likely accelerate in the second half, with consumption set to pick up steam amid the better containment of COVID-19 and investment growth foreseen to stay steady, driven by the infrastructure and manufacturing sectors, Hu said.

She added the country's mild inflation level, relatively low stock valuations and supportive macroeconomic policy are also key ingredients of the attractiveness of Chinese equities.

On Wednesday, the Shanghai Composite Index, a benchmark of China's A-share market, shed 1.43 percent to close at 3355.35 points, marking the biggest loss in more than a month, after the country's central bank withdrew liquidity on a net basis via reverse repos for the third consecutive day this week.

While the move of liquidity withdrawal on a net basis has raised concerns among some investors that the central bank will turn less supportive in the second half, Hu said monetary conditions still need to stay accommodative to sustain China's economic recovery.

"I expect policy support to be further strengthened," Hu said, adding the remainder of the year may see one or two cuts in the reserve requirement ratio or RRR and credit easing for smaller businesses and the property sector.

On the fiscal side, more measures to boost consumption may be in the pipeline, such as in the sectors of automobiles and green appliances and in the form of consumption vouchers, Hu said.

However, the possibility of implementing enormous stimulus for the sake of fulfilling this year's GDP growth target of around 5.5 percent is low, said Hu, who expects China's economy to grow by around 3 percent this year.

Bank of China said in a report on Tuesday the central bank is expected to maintain ample liquidity conditions via various tools in the second half, including cutting the RRR if necessary.

Given the policy support to facilitate economic recovery, the uptick in China's A-share market may continue, though fluctuations may persist due to COVID-19 uncertainties, slower global growth and other factors, the BOC report said.