China stock market

UBS bets on sustained rebound for Chinese stocks as pro-growth policies play out

Cyclical stocks like railway builders are expected to lead the rebound, amid a projected 14pc rise of the big caps index for 2018

PUBLISHED : Tuesday, 21 August, 2018, 4:41pm
UPDATED : Tuesday, 21 August, 2018, 11:09pm

China’s ongoing stock rebound will probably be sustained for three months as policymakers’ recent measures to boost investment play out to stabilise growth, according to UBS Group.

Cyclical stocks, or companies whose earnings are most reliant on the economic cycles, would lead the bounce and the CSI 300 Index of Chinese big-caps would rise 14 per cent by the year end, said Gao Ting, a strategist with the biggest Swiss bank at a briefing in Shanghai on Tuesday.

The CSI 300 Index of the 300 largest companies on the mainland’s two exchanges has risen 3 per cent after tumbling to a 23-month low on Friday. The bounce was spurred by the government’s pledge to spend more on infrastructure projects and the call for commercial banks to boost lending. Still, the gauge remains down 17 per cent this year as the worst performer among the world’s major stock markets, as China’s trade war with the US escalates and a deleveraging move to cut corporate debts deepens.

“These measures will have an effect at last in the short term and can stabilise growth,” Gao said. “You don’t need to doubt about that. The market will have some upside room to run.”

The CSI 300 climbed 1.8 per cent to 3,326.65 at the close on Tuesday.

The market will have some upside room to run
Gao Ting, UBS

UBS has set a year-end target of 3,800 for the big caps gauge, and earnings growth for the companies on the measure are estimated to reach 5 per cent in the following 12 months, according to the Swiss bank.

Cyclical companies such as railway builders were likely to outperform the other sectors in the rebound, while the previous sell-off offered a long-term buying opportunity for pharmaceutical and consumer companies, Gao said, without naming specific stocks.

UBS is avoiding property developers, building material makers and brokerages, as curbs on rising home prices are set to take its toll on sales and the ongoing financial deleveraging will hurt earnings.

The Swiss bank was bullish on consumer staple stocks, because the industry consolidation raises the pricing power for big players, said Christine Peng, an analyst tracking the consumer industry at UBS in a separate briefing.

Peng said investors should avoid consumer-discretionary companies including carmakers and home appliance manufacturers, as declining home prices could reduce the wealth effect among Chinese citizens, and the recent collapse of peer-to-peer lending platforms have hurt some investors.