UBS stays upbeat on stocks in China’s bear market as policy easing measures gain momentum
- The CSI 300 Index of biggest stocks in Shanghai and Shenzhen has lost more than 20 per cent from its February 2021 peak, a technical bear market
- UBS expects PBOC to lower the reserve-requirement ratio this year, among key calls on the policy front
UBS is turning more upbeat on China’s onshore stocks, now in a bear market, on signs policymakers are stepping up efforts to shore up faltering growth momentum.
A torrent of credit from local commercial banks, easier financing for home purchases and fee cuts for smaller businesses are among signals officials are treating China’s slowest growth since mid-2020 with urgency, according to Meng Lei, a Shanghai-based strategist at the Swiss investment bank.
The CSI 300 Index of the biggest stocks in Shanghai and Shenzhen has lost more than 20 per cent from its February 2021 peak, a technical bear market, as a combination of a power crisis, Covid-19 and debt defaults hobbled activity. This year, the Shanghai Composite Index has weakened about 5 per cent while the ChiNext in Shenzhen tumbled 14 per cent.
“Most of the market risk factors have dissipated,” Meng said in a February 23 note to clients. “While it will take time for sentiment to recover, investors could become more positive” about the market outlook going forward, he added.
UBS expects China’s central bank to lower the reserve-requirement ratio this year, adding to two cuts in policy interest rates in December and January to slash funding costs for businesses. Banks wrote a record 3.98 trillion yuan (US$630 billion) of new loans last month, a sign China is reopening the lending tap.
Beijing has also revised an industry-wide rule that allows developers to dip into funds from home presales to ease a cash crunch, while local governments in more mainland cities have loosened the requirements for house buyers to spur sales.
In contrast, analysts at Bocom International and Montreal-based BCA Research are more guarded in their market assessments. Rate increases in the US pose a major risk to assets in emerging markets, Bocom said, while credit expansion was not large enough to reduce the odds of a corporate earnings recession.
Traders will soon get a chance to see how deep Chinese policymakers are willing to dig into their policy toolbox. China holds its annual legislative and consultative conferences, known as the Two Sessions next week, where major economic and industrial policies and fiscal spending plans are deliberated.
UBS declined to comment on geopolitical risks arising from the Russia-Ukraine conflict, which flared up on Thursday subsequent to its note on Wednesday.
Heightened volatility shows markets had not fully priced in the likelihood of deeper conflict, according to Mark Haefele, chief investment officer for the global wealth management unit at UBS, a separate entity within the Swiss group.
“While it is impossible to judge the precise magnitude of geopolitical effects on markets, such events have generally not prevented equities from moving higher over a medium-term horizon,” he wrote in a February 24 note to clients. “Drawdowns driven by geopolitical stress events are typically short-lived for well diversified portfolios.
Meng, who is based in Shanghai, expects investors to shift back to growth stocks as sentiment improves. Growth companies with fair valuations and substantial declines this year could be back in favour, he said.
“Defensiveness may cease to be the focus of investors’ consideration,” he added.
Author: Zhang Shidong, SCMP