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<Research>UBS: If CN Successfully Moves towards Reflation, Stock Mkt Could Potentially Rise by 20%; Reduce Exposure to Internet Sector
Recommend 27 Positive 27 Negative 39 |
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Global commodity prices elevated 9% last year and has drifted higher this year, UBS said in a report. For many Chinese companies, higher input costs present a dilemma - either raise prices or endure a decline in margins. According to the broker's industry analysts' bottom-up survey, more companies are inclined to raise prices this year, and most industries expect better revenue pricing trends compared to last year. As excess capacity decreases and the Chinese government focuses more on inflation and "anti-involution", this could evolve into a positive inflationary cycle, in UBS view. On the flip side, if companies raise prices, it may lead to a decrease in sales volume, forcing companies to lower prices again and endure even lower margins. Therefore, the Chinese stock market could in the second half of the year face a crossroads - reflate as inflation expectations rise or deflate as company earnings expectations are lowered. The broker estimated that if companies fail to raise prices this year, the MSCI China Index EBIT could drop by about 7%; however, if China moves towards reflation, the broker spotted a 20% upside potential. The broker adjusted its investment portfolio: (1) downgraded the software sector to Underweight for ongoing AI disruption concerns and high valuations; (2) adjusted consumer staples to Neutral, but downgraded home appliances and consumer electronics to Underweight on higher input costs; (3) adjusted real estate to Neutral on potential further government policy measures; (4) reduced the internet sector, removing NetEase (NTES.US) due to ongoing regulatory and AI disruption uncertainties. However, the broker still believed that TENCENT (00700.HK) and Alibaba (BABA.US) are the best ways to capture the monetization path of China's AI and LLM. AASTOCKS Financial News Website: www.aastocks.com |
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