Better-than-expected interim results for Chinese companies together with policy measures boosting loan growth have encouraged the Swiss private bank to remain positive on China equities, according to its latest chief investment office report.
“More companies delivered positive surprises on earnings than on revenue, indicating that margin expansion was the key driver. Internet (in particular e-commerce), consumer, financial and energy sectors posted net beats, while auto, capital goods and information technology (hardware and semiconductor) posted net misses,” according to the the authors, led by Tomas Deng, regional CIO and chief China strategist.
Last month, UBS WM, which oversees about $2.5trn of invested assets, announced that it had turned underweight on global equities for the first time since the Eurozone crisis in 2012. The decision was largely based on political and economic risks induced by a worsening of the Sino-US trade dispute, said the bank’s global investment chief, Mark Haefele.
Despite China being the locus of the conflict, UBS WM retains a soft-spot for Chinese equities.
Its view is predicated on the historical cheapness of market indices, surprisingly strong earnings and confidence in the ability of the country’s authorities to boost economic growth.
The MSCI China Index is trading at a forward price-to-earnings ratio of 10x, which is below its long-term average (11.2 times). Meanwhile, the A-share market (CSI 300 Index), which is up 29% so far this year, reported 12% year-on-year earnings growth in the first half of 2019, ahead of UBS WM’s expectations.
Dedicated China funds with high allocations to A-shares compared with H-share, such as those run by Aberdeen Standard Investments, First State and JP Morgan, have outperformed the China fund sector so far this year.
UBS WM maintains an overweight allocation to China (H-shares) versus Hong Kong in its regional equity strategy, as the former should outperform the latter because of government policy support and superior earnings growth. Its sector preferences are those that will be supported by potential fiscal and monetary stimulus measures, such consumer staples, e-commerce and healthcare.
Financial stocks posted especially strong results, with banks delivering 7% year-on-year earnings growth on the back of strong credit growth, stable asset quality and higher fees, while insurers posted better-than-expected results as well thanks to strong investment returns, tax benefits and expanding margins, according to the report.
However, UBS WM’s “constructive” outlook for Chinese equities is tempered by its wariness of continued constraints on further earnings growth across corporate China because of the trade dispute.
China equities sector performance
Comparative performance of China vs key indices