UBS bullish on China, as profit growth, buy-backs give MSCI Index a 10% upside

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‘The driver of the stock market is not GDP growth, but improvements in ROE and profit growth,’ UBS’s China strategist James Wang says

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The MSCI China Index has risen 2 per cent this year, erasing most of the gains from earlier this year. Photo: Shutterstock

Zhang Shidongin ShanghaiandYuke Xiein Beijing

Published: 4:29pm, 2 Sep 2024Updated: 4:35pm, 2 Sep 2024

The MSCI China Index will probably rise as much as 10 per cent in the next three to six months, as earnings growth picks up and companies look to boost returns to shareholders through buy-backs and improved governance, according to UBS Group.

The gains will be driven by an average 7 per cent growth in profit for companies on the index in the second half and some valuation expansion, James Wang, head of China strategy at the Swiss bank, said in a briefing in Shenzhen on Monday.

The dismal outlook for China’s economic growth actually has no material impact on stocks, and investors should focus on the return-on-equity ratio (ROE), a metric that is expected to see an inflection point in the emerging new-economy industries and is used to gauge the performance of state-owned enterprises (SOEs), he said.

“Interestingly, our analysis of Asian markets, where investors typically seek high economic growth, shows that the correlation between annual GDP [gross domestic product] growth and stock market performance is extremely low,” said Wang. “The driver of the stock market is not GDP growth, but improvements in ROE and profit growth.”

The call makes UBS an outlier among the global investment community, as most investment banks and asset-management firms are bearish on Chinese stocks because of the persistent slump in home prices and weakening consumer spending. Global hedge funds’ position on Chinese stocks were at near a five-year low in July, according to Goldman Sachs, while Morgan Stanley warned that Chinese equities may be in a secular bear market.