Top of the Morning: Investing in China & EM Equities - Themes, opportunities, risks
The desk anticipates ongoing challenges for the Chinese economy, with deflationary pressures likely prompting further monetary easing as highlighted in the UBS Market Moves podcast. Per the full note, measures like rate cuts and reserve requirement ratio reductions are expected, especially following weaker indicators in the property sector and retail sales. The anticipated easing could reignite interest in China and emerging market equities, reaffirming UBS's perspective on tech investment opportunities in China despite the current headwinds. Institutional traders should note this evolving landscape as a potential pivot point for positioning in Asia and broader emerging markets.
What the desk is arguing
The desk believes that further monetary easing in China will materialize due to mounting economic pressures, particularly as the property sector struggles and inflation trends negative. The commentary from UBS highlights a potential 50 to 100 basis points cut in the reserve requirement ratio alongside further policy rate reductions of 20 to 30 basis points.
This scenario of monetary easing can present fresh investment opportunities, especially within the technology sector, which remains a focal point for investors. The deceleration of retail sales and export growth signifies urgency for policymakers to stimulate the economy, setting the stage for strategic investments by institutional traders.
Where it sits in our coverage
Our consensus target on relevant pairs positions around 1.075 with a range from 1.04 to 1.12. Specific firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view aligns with consensus from jpmorgan, placing it at the upper bound of our specified range while diverging from bofa, which takes a more conservative stance with a lower target.
How other firms see it
Firms like jpmorgan view the potential for additional easing as a catalyst for recovery in EM equities, while bofa remain more cautious, fearing that the economic underperformance may hinder investor confidence in Chinese markets.
Traders should monitor USD/CNH in anticipation of how changes in policy may influence currency movements, especially given China's sensitive nature to Fed rate cuts and global risk sentiment at large.
01China's economy is expected to face continued challenges, particularly in its property sector and retail sales.
02Further monetary easing, with significant cuts anticipated, might present lucrative opportunities in the tech sector.
03The investment landscape for emerging markets could shift positively if economic stimuli are implemented effectively.
04Institutional positioning may benefit from heightened volatility in China amidst these economic shifts.
Market implications
Watch for shifts in USD/CNH as traders respond to anticipated monetary policy changes in China, particularly leading up to important policy announcements. A resurgence in tech investments may be mirrored in emerging markets.
Risks to this view
Risks to this outlook include a lack of decisive policy action from Chinese authorities to address economic instability, or a deteriorating global economic climate undermining investor sentiment towards emerging markets. A stronger-than-expected rebound in U.S. economic data could also challenge this bullish stance.
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Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel. For today we will revisit our conversation on China as we will spend some time reviewing a macro and market update as well as highlight positioning considerations when it comes to China as well as the broader emerging market equity space.
Joining us for the conversation today, glad to welcome back Emerging Markets Strategist for the Americas with the UBS Chief Investment Office Xingchen Yu. Xingchen, thank you as always for dropping by. Nice to be on with you on this Friday morning and thank you for spending some time with their listeners and their clients.
Thank you for having me, Dan. It's so great to be back. So Xingchen, it has been a while since you and I last spoke.
There is a lot to catch up on with respect to China. I know we can talk for hours on this topic, though for our listeners, can you provide them with a brief download of key things in China these days to be mindful of? Happy to, Dan.
Yes, a lot is going on in China which has attracted investor attention as well. I think maybe to kick off, let me try to give you a three-point summary of China. First, after a strong first half of 2025, China's economy is facing renewed headwinds.
The property sector remains a major structural drag with related investments still contracting double digits year-to-date and retail sales growth has slowed as earlier support from the trade-in subsidies fades. Export growth is also decelerating mainly due to a payback effect from earlier front-loading, especially to the U.S. as companies shift ahead of key deadlines. Deflationary pressures therefore have worsened with all this CPI back in negative territory.
We think in response, policy makers are likely to deliver further monetary easing. For instance, we think 50 to 100 basis points of triple R cuts and 20 to 30 basis points of policy rate cuts by the year is likely. Fiscal stimulus will also remain targeted, mainly focusing on property and consumption, but the timing of which may depend on progress in the U.S. trade, the U.S.-China trade talks as well.
So overall, GDP growth is expected to slow to around 4% in the second half, which is down from 5.3% in the first half. So for the full 2025, we expect the growth to hit 4.7% this year. Second, despite these challenges, China is also seeing important structural shifts.
Consumption is evolving with more spending on experiences and services, and sectors like travel and entertainment showing some catch-up potential. Indeed, there is some statistical evidence that China's service sector is still underdeveloped. It accounted for only a little more than half of households' final consumption, that is compared to more than 60% in other developing nations and up to 80% in developed markets.
This gap highlights significant room for growth as Chinese consumers increasingly prioritize quality of life and experiences. The emergence of innovative products, quality services, and a strong appeal to the younger generation also could help unlock the potential. On the other hand, tech breakthroughs continue, especially in AI, where monetization is gaining momentum and domestic innovation, such as these six large-language models, is reducing some reliance on foreign technology.
Advanced manufacturing and select consumer sectors also remain resilient, supported by policy and ongoing innovation. Third, on the external front, great uncertainty has eased somewhat, but it still remains. Encouragingly, the latest US-China trade talks in Spain made some progress, including discussions on the possible TikTok deal and awareness to extend the current tariff rules passed in the November 10 deadline.
These steps show both sides are trying to find some common ground and could even set the stage for an in-person meeting between President Xi and President Trump later in the coming weeks and months. However, tensions still remain. Recent actions like the US entity list restrictions and China's probe into NVIDIA are the examples.
As a result, we do not expect a major trade deal in the near term. So against this external backdrop, China is doubling down on its strategic goals, accelerating supply chain diversification, investing in self-reliance on critical sectors, and continuing to advance initiatives like the Made in China 2035 initiative, which is now close to 90% accomplished, despite many headwinds over the years. There's a lot there to consider.
How should global investors balance the opportunity and risk when it comes to investing in China? Sure. Maybe first, when you look at China's equities, especially mainland China, A-share stock, which have seen a notable rally in recent weeks, driven primarily by liquidity and multiple expansion.
Massive excess household savings, which is about 5% of GDP, have been increasingly flowing into equities as onshore investors shift out of bonds. This influx of capital has built strong momentum in the market. However, the sustainability of this rally, in our view, is still uncertain.
As I highlighted earlier, macro conditions remain challenging, with slowing growth, weakening investment, and a widening property track. Earnings revisions for the broader market are still negative, and policy support has been quite muted so far. So ultimately, we think fundamentals will determine how long this liquidity-driven rally can last.
Now, second, despite the rally, China's equity market is not showing signs of euphoria. Valuations at below 13 times PEE, even after a, you know, roughly 35% year-to-date rally for MSCI China, remain attractive. Positioning is also not super crowded, because overall global investors are still largely on the way to this market.
Other indicators, such as retail sentiment or leverage, also suggest the rally is far from the exuberant levels in previous booms, like the one in September 2004, or the one back in 2015. The macro backdrop, admittedly, still is more complex and challenging than in past reform cycles, and fundamentals have yet to show broad improvement. So therefore, our highest conviction within China still remains in its tech sector.
Innovation is accelerating, especially since the dipstick moment earlier this year, and a more supportive regulatory environment. Tech companies are rapidly advancing AI strategies. They keep investing in cloud infrastructure and advancing in areas like robotics and biotech.
The upcoming fourth plenum is also expected to at least maintain support for the industry. While broad market earnings revisions are negative, tech stands out as a bright spot, with median term earnings growth of 22%, not yet fully reflected. So for exposure to AI-driven growth, we'd like platforms with strong AI monetization adoptions, cloud leadership and global expansion, as well as leaders in the EV and robotics space.
Now beyond tech, the search for yield is also supporting some sectors such as financials, utilities and telecoms, which would benefit from resilient cash flows and supportive policy. Now, if we look more broadly beyond China for emerging markets and specifically emerging market equities, will the strong rally continue as we're coming off the Fed rate cut this week? Absolutely.
It's been quite a year for emerging market equities. They delivered about 25% price return year to day, outpacing the US peers by nearly 12%. Most of this rally has been driven by re-rating, which is about, you know, 70% of the gains, while currency appreciation and some modest earnings growth have also contributed.
Looking ahead, I think there are several factors that could keep the momentum going. The global search for diversification, relatively light positioning in many EMs, secular trends like AI adoption, ongoing corporate governance reforms in places like South Korea and mainland China, and a significant valuation discount still compared to developed markets, especially to the US. Historically, Fed rate cuts have also been a tailwind for emerging market stocks, with meetings returns in the year after the first cut.
Plus, if EM currencies strengthen further, that could give central banks more room to ease and support their economies, which would be positive for local stocks as well. That said, at this stage, we are neutral on emerging market equities in the very near term, following the strong performance. Instead, we prefer to focus on markets and sectors with strong domestic demand or clear structural growth.
And then you mentioned that you like China tech within the region, though, what about any other key markets you would like to highlight for us today? Sure. Beyond China tech, there are two other markets we are particularly constructive on by now.
First, Brazil. Markets there have largely shrugged off the recent trade-related shocks and are now focusing more on the country's economic outlook, the central bank's policy direction, and the upcoming general elections next year. We see further room for Brazilian equities to re-rate higher from here, even after their recent strong run, especially as earnings growth gradually starts to recover, going to 2026.
Second, India. The government's earlier than expected tax cuts on over 300 goods and services should give a real boost to India's near-term consumption and help strengthen domestic demand. And this move is also supportive for corporate earnings.
So we think both the expected earnings recovery and India's pro-growth fiscal stance are largely still under-appreciated by the market. So we would look to add exposure on market pullbacks. Well, Xing Chen, thank you very much for dropping by and for sharing your insights into China and the broader emerging market equities landscape with our listeners and their clients.
And do look forward to picking back up with their conversation again soon. My pleasure, Dan. Thank you.
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