UBS expects Chinese stocks to rise 20%. What can push the market?

Chinese stocks may rise by 20% as rising inflation expectations lead to better corporate earnings, according to analysts at UBS Securities Asia. Their opinion is published by Bloomberg.

A survey of industry analysts at UBS shows that more and more Chinese companies are planning to raise prices for their products this year amid rising costs, while the problem of overcapacity is beginning to subside. In conditions of such "reflationary environment" (acceleration of price growth and recovery of economic activity) in the market it can lead to revaluation of multiples and acceleration of growth of earnings per share of Chinese companies, Bloomberg writes, noting that in the end, according to UBS analysts, such situation can push the international index of Chinese shares MSCI China Index by 20%.

If price growth accelerates, inflation-sensitive stocks - including consumer staples - could rise markedly as investors have not yet built a reflationary scenario into their expectations, according to UBS strategists led by James Wang.

China's Producer Price Index (PPI), which reflects the change in prices of goods at the stage of their production, began to decline less sharply in January this year, the analyst noted, and corporate profits show signs of improvement. Chinese bond yields are also gradually rising, he pointed out. However, if PRC companies fail to raise prices due to weak sales, profit forecasts will be revised downward, which could lead to a 7-10% decline in Chinese stocks, UBS warned.

"The experience of the Japanese market in 2022 shows that the materials, financials and real estate sectors performed best under reflation," the analysts said. In China, in their opinion, the first beneficiaries of reflation may be certain segments of the consumer sector, as investors are still poorly represented in these securities.

UBS raised its recommendation on Chinese real estate and FMCG sectors from "below market" to "neutral". At the same time, the analysts, on the contrary, downgraded their assessment of the Chinese software sector to "below market" - due to the continuing risks of technological destabilization and high valuation of companies.

Major banks also remain optimistic about the Chinese stock market amid the development of artificial intelligence and government support measures. In January, Goldman Sachs Group also predicted the growth of the Chinese index by 20%, Bloomberg writes.

"The expected growth of shares in 2026 will be almost entirely due to the increase in corporate profits," the analysts noted. According to them, the dynamics will be supported by AI, the strategy of Chinese companies entering foreign markets ("Going Global") and measures of the Chinese authorities to combat excessive competition.

"As the Shanghai Composite approaches the highs before the current correction, the spring rally has entered its second phase," RTHK quoted analysts at Huatai Futures as saying. According to them, sentiment has cooled after rebounding amid a resumption of trading at the end of the nine-day Lunar New Year holiday, with focus shifting to the upcoming meetings of the National People's Congress and the Chinese People's Political Consultative Conference in search of new signals on economic policy from the Chinese authorities.

Chinese stocks moved lower on Thursday, February 26, breaking a two-day rally after the Lunar New Year as investors took a wait-and-see stance ahead of next month's annual session of the Chinese parliament, Radio Television Hong Kong (RTHK) reported.

- China's main stock index Shanghai Composite declined by 0.1% to 4,144.08 points on February 26. By the close of the market in China, the index did not change its values relative to the previous close. The index reached its peak of 4,165 points in mid-January.

- China's blue-chip index CSI 300 was down 0.2%.

- The real estate sector was the leader of the fall in it on February 26: the CSI 300 Real Estate Index lost 2.7%, leveling out all the growth recorded the day before after Shanghai eased the rules of buying homes for non-residents, RTHK notes.

- Additional pressure came from the alcoholic beverages sector (-1.3%) and energy (nearly -1%).

- The MSCI China Index added 0.5% in trading on February 26. In February, it fell by 5%, leveling the growth since the beginning of the year, after a jump of 40% from the April low, which it reached amid the trade war between the U.S. and China, draws the attention of Bloomberg. Since the beginning of the year, the index has added 1.4%.

This year, the Chinese market is lagging behind Asian and global peers, Bloomberg notes. Thus, the South Korean stock market came out on February 25 to the ninth place in the world in terms of capitalization, surpassing France and Germany. South Korea's benchmark index KOSPI has grown by about 44% since the beginning of the year and has become the best performing stock market in the world this year. Shanghai Composite, in turn, is up 4.48% since the beginning of 2026.

This article was AI-translated and verified by a human editor