Chinese equities are experiencing a sharp rally. UBS believes that FOMO – fear of missing out – is not an investment strategy, adding that more monetary and fiscal support is required for a sustained upturn.
Since mid-September, CSI 300 Index – a key Chinese equity benchmark – has shot up over 20 percent. The index recorded its best seven-day performance last week since 1998.
The upturn follows announcements of monetary easing last week that were more aggressive than anticipated as well as further easing in the property market, including reduced mortgage rates for existing home loans and curb lifts in first-tier cities.
Explaining the Rally
According to UBS, the initial move upward suggests «a significant global short-covering event». The bank also believes that the timing of the stimulus launch in China may be to preempt risks linked to US elections.
«However, harsh export tariffs under a second Trump presidency, or incremental national security and tech restrictions under Biden and Harris remain very real prospects,» UBS Global Wealth Management said in a recent investment note.
Follow-Through Required
Although there is more room for a market re-rating, UBS said that follow-through is required for a sustained rally. This includes sufficient fiscal support, policy execution and capital market buying.
«Investors considering China exposure must also recognize that the full scope, scale, and implementation of stimulus remain uncertain, and that from a growth perspective, a fundamental turnaround will likely require additional fiscal support for the property market,» the bank explained.
«FOMO—fear of missing out—is not an investment strategy [...] Past equity rallies, as in May 2023, have fizzled out when key stimulus or policy changes failed to match their initial promise.»
Internet and Consumer Names
For investors considering adding exposure, UBS recommends focusing on growth via leading internet and consumer names. To account for risks, including from geopolitics, it also suggests maintaining exposure to defensive, high-yielding names in the state-owned-enterprise-concentrated telecoms, energy, utilities and financials sectors.
The bank expects a Chinese equity upside of low-single digit percentage for the fourth quarter of 2024 and high single-digit upside in 2025, subject to the trade policy under the new US administration.
