UBS China Equity Strategy: A-Share Earnings Recovery — How Is It Progressing?
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UBS expects A-share earnings growth to accelerate to 8% year-over-year in 2026, supported by mild valuation re-rating that could sustain a gradual bull market. Top-down, non-financial A-share revenue growth correlates closely with nominal GDP growth and PPI. UBS forecasts nominal GDP growth to improve to 4.3% in 2026 from 4.0%, while PPI deflation continues to narrow, turning positive by late 2026 or early 2027. Supportive policies and anti-competition measures should drive ongoing margin expansion. Bottom-up signals confirm the recovery trend. Industrial enterprise profits turned positive for the first time since 2022, growing 0.6% in 2025. Non-financial A-shares posted 4.8% earnings growth in Q3 2025, a sharp rebound from negative 3.2% in Q2. Consensus earnings estimates for the CSI 300 are being revised upward, echoing patterns seen in 2017, 2019, and 2021. Over the past six months, 2026 earnings forecasts for IT and Materials sectors have been lifted by over 20 percentage points. The 2025 market rally was primarily driven by liquidity, with the Wind All A Index surging 26.4% while earnings grew just 5.5%. In the medium term, incremental macro policies, earnings acceleration, and declining risk-free rates underpin the gradual bull thesis. Short-term volatility from geopolitical risks and tech corrections is expected. UBS recommends balancing growth and value, favoring growth once sentiment stabilizes. Overweight sectors include Electronics, Telecom, Non-bank Financials, Defense, Non-ferrous Metals, Chemicals, and Electrical Equipment.