UBS China Equity Strategy: Could China Be Asia's Next Reflation Trade?
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UBS explores whether China could emerge as Asia's next major reflation trade. Following a 9% surge in global commodity prices in 2025, Chinese companies face mounting input cost pressures, forcing a choice between raising prices or accepting margin compression. A UBS analyst survey indicates that average expected price changes for 2026 sit at a 2% increase, a significant improvement from a 3% decline in 2025. Furthermore, half of all industries plan price hikes, and over 50% believe excess capacity has improved.
If companies successfully pass on costs, the MSCI China Index has roughly 20% EBIT upside potential, combining a 16% multiple re-rating with 3–4% EPS growth. Conversely, failure to raise prices could reduce EBIT by approximately 7%. Japan's 2022 reflation experience suggests that materials, financials, and real estate typically outperform initially. However, a Chinese reflation scenario might also heavily favor undervalued, under-positioned consumer sectors like liquor, dining, and furniture.
Reflecting these dynamics, UBS upgrades real estate and consumer staples to Neutral while downgrading software, consumer electronics, and home appliances to Underweight. Due to AI disruption and antitrust concerns, the firm also temporarily prefers A-shares over H-shares. Top preferred names include CATL, Fuyao Glass, and Tencent, while Shengyi Technology and Dongfang Electric are newly added.