UBS: Continues to view Hong Kong stocks positively, favoring large-cap Chinese internet stocks; simulated portfolio newly includes JD.com Group-SW and Baidu Group-SW

UBS releases a research report stating that since the outbreak of the Iran conflict, the MSCI China Index has outperformed the global index by approximately 1.4%, and A-shares have shown greater resilience, with the CSI 300 Index remaining essentially flat during this period. The bank believes this further proves that the Chinese stock market offers a viable diversification option for global investors.

From a fundamental perspective, recent geopolitical events pose limited downside risk to the Chinese market, due to factors including: 1) China’s low dependence on oil, accounting for only about 20% of total energy consumption; 2) ample oil reserves (about 4 months or 1.3 billion barrels); 3) government pricing mechanisms that prevent full pass-through of oil price increases to downstream consumers; 4) higher input costs may boost PPI and inflation expectations, which is positive in the current deflationary environment.

In terms of market preferences, the bank favors A-shares for reasons including: 1) potential government capital inflows providing downside support; 2) lower correlation with global indices compared to H-shares and ADRs; 3) ample liquidity; 4) benefiting from policy support. Within A-shares, the preferred sectors include hardware technology, non-ferrous metals, internet, electrical equipment, brokerages, and “going overseas” related stocks.

UBS believes that higher input costs are not necessarily a bad thing. Although increased costs may compress corporate profit margins, the negative impact on Chinese companies is relatively small. Historically, PPI has been highly correlated with corporate revenue; rising PPI (or narrowing declines) often accelerates revenue growth, creating a positive leverage effect on profits. Additionally, several industries are seeking price increases, and rising oil prices may provide further momentum (e.g., chemical industry). If investors believe the Chinese economy can sustain an inflationary environment, stock prices could have upward potential.

In A-shares, the bank prefers hardware technology, non-ferrous metals, internet, electrical equipment, brokerages, and “going overseas” stocks. Regarding H-shares, the bank remains optimistic about large internet companies and has added JD.com-SW (09618) and Baidu Group-SW (09888) to its model portfolio due to their low holdings, reasonable valuations, and active shareholder return initiatives.

(Author: Wang Zhiqiang HF013)

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