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Analysts at UBS said they favored Chinese stocks over their Asian peers and added two more to their focus list for the country, citing holdings in internet stocks and defensive stocks as the best combination of China exposure.
UBS expects China to outperform broader Asian markets this year with high single-digit index returns.
The brokerage firm has outlined a “hawkish” approach to investing in China, holding stakes in defensive sectors, such as financials, utilities, energy and telecoms, and in growth names, particularly internet stocks.
To that end, the company added e-commerce company JD.com (HK:) (NASDAQ:) to its China focus list, citing steady revenue growth and strong margins.
JD’s strong cash flows also point to increased buybacks by the company, while recent stimulus measures, especially those for the real estate market, are expected to benefit the company.
“The main risk to our view is more intense competition in China’s e-commerce sector, which could lead to lower margins and increased spending on sales and marketing,” UBS analysts said.
Among defensive stocks, UBS added China Communications Construction (HK:) to its China focus list.
The brokerage said it expects the company to benefit from a range of property and infrastructure support measures outlined by Beijing, particularly plans to boost spending on new infrastructure projects.
The establishment of an infrastructure real estate investment trust in China is also expected to provide stronger cash flows for the company.
Overall, UBS said Beijing’s measures to support the property market are likely to start bearing fruit in the third quarter of 2024, with a balanced housing market also set to help stabilize weak consumption.
“We suggest investors add exposure to near-term growth while maintaining some exposure to the defensive sector, which should provide more resilient earnings and attractive dividend yields,” UBS analysts said.
In the longer term, UBS expects growth in Chinese growth stocks to slow, and favors stocks with high consumer exposure and strong potential for global expansion.
