UBS Equities-China Equity Strategy _A-share outlook H225 Five types of f...

ab17 June 2025Global ResearchChina Equity StrategyA-share outlook H225: Five types of fund flows, five macro-scenario allocationsEarnings may recover sequentially; trade/policy a swing factor for valuationAssuming US/China tariffs remain at their current levels, we expect CSI 300 A-share EPS to grow 6% YoY in 2025. Given the low base, we expect A-share earnings to rebound modestly each quarter this year, but deflationary pressure may constrain upward revisions to overall earnings estimates. Amid uncertainties related to China-US trade friction, A-share valuations may be range-bound at low levels near term. Medium term, valuations may be disrupted by the evolving trade talks; we expect limited downside, and potential upside catalysts mainly from stronger policy easing, the continual entry of medium/long-term funds and structural reforms. In extreme conditions, the 'national team' has the capability to further raise its holdings to stabilise the market. Five types of fund flows; their impact on market styles amid macro uncertaintyBased on our talks with investors, it seems there is little consensus on how the macro situation might evolve in H2. Concerns over domestic demand are mainly focused on property and deflationary pressure, while China-US trade friction and the magnitude of policy easing are hard to predict. Thus, amid uncertainties, our focus is diving into fund flow structure and market style. We analyse the flows of five types of funds in H1 and provide an outlook on their potential flows in H2: 1) the 'national team' (Central Huijin) entered the market significantly when it corrected, with 70% of its investments in 2024 flowing into CSI 300 ETFs; 2) medium/long-term investors and insurers favour high-dividend stocks and banks, bringing synergies with Central Huijin; 3) increased turnover from retail and short-term investors/quant may lead to continued small-cap outperformance near term—index enhanced products carry exposure to small/micro caps; 4) mutual funds (MFs)—active funds' issuance has been subdued, dragging MF-dominated growth sectors; 5) southbound—after strong inflows into new-economy sectors in H1, we expect inflows to continue in H2, albeit at a marginally slower pace. Sector preferences and investment themes in five scenariosIn Figure 42, we map out our allocations and themes for five scenarios that assume different developments in trade frictions and magnitudes of policy easing. Trade friction de-escalation may help export-oriented sectors and lift share prices for high-beta sectors (mainly TMT); otherwise investors may prefer defence, self-reliance and defensive/high-dividend names. Assuming stronger policy stimulus, consumption and property sectors may benefit most. If easing is modest, services and AI themes may see inflows. Our top A-share picks within UBS-S coverageRatingMkt cap (Rmb 100mn)Last price (Rmb)Price Target (Rmb)UpsideAvg. daily t/o (RMB 100mn)EPS growthEPS growthPEPB2025E2026E2025E2025E60