UBS Wealth Management (UBS WM) has downgraded its outlook on Chinese equities to neutral from most preferred as the world’s most populous country grapples with a series of headwinds including the ongoing impact of its zero-Covid strategy and a property crisis.
“Three key reasons underpin our China cut. First, the economic recovery remains tepid and is unlikely to accelerate until the restrictive Covid policies change,” chief investment officer of UBS’ global wealth management division Mark Haefele and Min Lan Tan, head chief investment office for Asia Pacific, wrote in a recent report.
“Second, the official property policy is focused on project completion and mitigating systemic risk, not stimulating housing demand.
“Finally, with revisions still on a downward trend, there’s little visibility of an earnings turnaround.”
UBS WM said that the economic recovery it expected to arrive in the third quarter would likely take longer to materialise. The Swiss bank added that any recovery would likely be “bumpier” than previously envisaged and the economy was expected to grow by just 3% this year.
It has been a tough quarter for Chinese equities. Having outperformed global stocks towards the end of the last quarter, the MSCI China index is down nearly 12% this quarter versus a 7% rebound in other Asia ex-Japan markets, UBS WM noted.
China watchers are hoping a slew of easing measures will be announced at the 20th Party Congress, which is slated to occur in either October or November, although UBS WM said this was unlikely as the Party Congress rarely covers short-term policy issues. The wealth manager said it was doubtful the Communist Party would abandon its zero-Covid strategy anytime soon.
However, UBS WM said it still saw opportunities in certain sectors that benefited from strong government support such as the electric vehicle sector and renewable energy operators. It also said that new economy company earnings may have finally bottomed out.
Meanwhile, UBS WM downgraded Indonesia to neutral, while Taiwan and the Philippines were upgraded to most preferred. The decision to rotate within southeast Asia made sense due to Indonesia’s outperformance to date, UBS WM noted. It also said the Philippines was set to benefit from a weaker dollar.
Taiwan has some of strongest returns on equity in the region, although UBS WM conceded that geopolitical tensions remained elevated.
UBS WM is not the only firm to have downgraded Chinese equities recently. Pictet Asset Management downgraded Chinese stocks to neutral from overweight. It noted that Chinese equities were currently cheap, although this was not enough to compensate for the risks, particularly in the country’s property sector.