UBS Equities-China Equity Strategy _2026 outlook - another leap forward_...-118891077

ab17 November 2025Global ResearchChina Equity Strategy2026 outlook - another leap forward?A continuation of positive factors into 2026We expect another positive year ahead for the Chinese equities as many of the favourable drivers from 2025 should continue to support the market including: 1) advancement in innovations, in particular AI; 2) accommodative policy for private enterprises and capital markets; 3) sustained fiscal expansion and ample liquidity under an easy monetary policy setting; and 4) potential inflows from domestic and foreign institutional investors. That said, these same factors are unlikely to lift valuation multiples to the same extent as this year and we expect the share price performance for 2026 to be driven more by earnings. We expect a 10% EPS growth in 2026 driven by anti-involution measures and lower D&A - assuming sectors that are undergoing anti-involution lift their profit margin half way to historical average, this could provide a 3ppt boost to MSCI China EPS while lower capex could lift EPS by c.1ppt. We continue to prefer internet, hardware tech and broker names while we remove high dividend stocks as their yield has been bid down and we add select "going abroad" stocks as global growth improves next year.Positive performance despite a lukewarm economyOur 2026 year end target for MSCI China is 100, implying 14% upside from here with 5% revenue growth (inline with nominal GDP growth) and10% EPS growth. We forecast 4% valuation uplift from continued inflows from: 1) domestic institutional investors (somewhat mandated), 2) retail investors (low interest rate), and 3) foreign institutional investors (diversification and relatively cheaper valuation). While we expect macro conditions to remain lukewarm due to a continued property downturn, this is broadly within market expectations as evidenced by the weak consumer sector share price performance in 2025. Meanwhile anti-involution will be the key factor in improving the earnings outlook: 1) historically MSCI China revenue was highly correlated with PPI and we expect PPI decline to ease to -0.4% in 4Q26, 2) sectors such as solar, lithium, express delivery and airlines have seen some early benefits from anti-involution as industry prices recovered, 3) capex declines have already seen D&A peak in most sectors outside of internet and this could further drive margin improvement in 2026.Style and sector allocationsWith dividend stocks (in HK in particular) having performed well in the last 5 years, we now find less available options - for example, we could not find financial stocks that now yield 6% or more while historically HK stocks with 6% dividend yield have outperformed. Instead we replace these with select "going abroad" stocks which have demonstrated margin and earnings resilience amid tariff uncertainties this year. We note that for listed "going abroad" stocks, revenue and earnings growth have accelerated in 2025 and exceeded that of the overall market. We conti