China Equity Strategy: How to Position if Oil Prices Stay Higher for Longer
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UBS examined the potential impact on Chinese equities if oil prices remain elevated for an extended period, particularly in a scenario involving a prolonged Strait of Hormuz closure. Through analyst surveys, stock price correlation analyses, and historical references to the 2022 Russia-Ukraine conflict, UBS constructed two distinct equity portfolios: one for sustained high oil prices and another for a subsequent price reversal. Overall, every 10% increase in oil prices could lift Chinese index earnings per share by 1-2%. Should Brent crude average US$100 per barrel annually, index EPS would see roughly 1% upside, primarily driven by the energy and chemical sectors.
Conversely, aviation, transportation, building materials, and certain consumer stocks face significant downside risks from rising fuel costs. A prolonged closure would transmit disruptions to Chinese markets through several channels, including higher US inflation and Treasury yields, declining US consumer purchasing power, and potential liquidity shocks that could trigger unwinds in crowded tech trades.
Interest-rate-sensitive sectors like biotech, software, and data centers are most vulnerable to rising bond yields. UBS notes the current environment may mirror the second phase of the 2022 oil shock, characterized by high and volatile prices. Defensive sectors include telecom, banks, energy, and currently less-crowded retail and sportswear segments. The report highlights different sector rotations depending on whether oil prices remain elevated or ultimately pull back.