[00:00] If recent headlines about China's stock market surge have you curious, where is the stock market? It's something that we've been hoping for, expected to see, and it's really coming through. An upward trend since September 2024, when China's stock market experienced its best day in 16 years,
[00:18] after the launch of government stimulus package. Until now, the Shanghai Complicate Index has hit 4,000 points, and the Shenzhen Component Index hit 14,000 points. This isn't just a simple balance.
[00:30] If you want to invest in future, if you want to invest in innovation, the Chinese debt-free market is definitely a good way to start to play that. UBS predicts a 10% growth on China equities earnings per share in 2026.
[00:43] We are positive, particularly in the first half. As for the new hotspot emerged so far this year. AI is going to be a very big thing. Building debt rotation. Chinese AI firms and chip makers have started blocking onto the stock market.
[00:57] AI is going to be the dominant thing still for global equities and the best way to say that is going to be to the US and China. Will this wave of stock price value continue in 2026 and how?
[01:11] I sat down with James Wong, Head of China Equity Strategy Research at UBS. Mr Wong, great to have you with us on Shanghai Eye. Thank you. UDS is a 2026 year end target of 30,000 for Hengstens Index and 100 for MSCI China.
[01:29] What do you think is the primary investment narrative supporting these targets and what is the biggest risk to achieving them? The way we think about the target is we think there's sort of 14-15% upside for the full year and we get it a couple of ways.
[01:43] So we think there's going to be ETF growth of up to 10% for the full year and maybe a bit of valuation up to say 4-5%. If you look at the average valuation for Chinese equities, particularly MSDI China for example,
[01:56] we're still trading around historical average. But versus global markets, MSDI Global or EM, we're still trading close to one standard deviation below historical average. So with US cutting interest rates most likely next year, we think there's good valuation
[02:12] upside for Chinese equities. The second part is on ETFs. So we've got 10% ETF growth and we'll break it down into a couple of parts. So we've got revenue growth of 5% for the full year, and that's just broadly consistent with our normal GDP growth of 4 to 5%.
[02:26] So consistent with what we've seen historically. And the second part is gonna come from margin expansion. So we've got 4% margin expansion. One part of that is we have seen, for example,
[02:38] depreciation peak up for listed companies. And what that will mean is because capex for listed companies have been declining. So if I look at listed companies, In 2024, CapEx have been declining
[02:51] to the extent of up to 10% for this company. It's recovered a little bit, but still on a declining trend in 2025. So for this year, 26, that declining CapEx
[03:03] should result in lower depreciation. So that provides a bit of an ETF boost to the extent of one to two percent point And the second part to that margin expansion is where it comes from anti So we have seen different sectors going through anti
[03:17] prices being increased for certain sectors, and we think that could contribute something like 2-3% to the ETF line. That gives us an earning flow of 9%. And now on top of that, we've got 1% buyback,
[03:30] which is a kind of running water for buyback, for timing equities, to all together 10% ETF growth and valuation of 4-5% in a 15% upside for Chinese equities. Where is China when you look at the
[03:43] 2026 global equity market outlook? As a house, we are positive on Chinese equities and US equities. So we've got this tech trade, and we believe AI is gonna be the dominant thing still
[03:57] for global equities, and the best way to play that is gonna be for US and China. Your 2026 outlook also notes that favorable factors like AI advancement and policy support may continue, but there's a moving forward, Crypt Decon.
[04:12] Does that imply a more selective and stock-ticker market in the year ahead? I do feel that long-term money are going to the AI sectors, but to be fair, the long-term money hasn't gone into the tech-share market.
[04:25] And that also comes from my other point is that offshore money, particularly long-term money, they haven't had the bang. And so we do need the teams to build up and then I think the foreign capitals will flow,
[04:39] the long-term money will come into some of these AI needs. But I think the interest is there. So the question about monetizing AI, I think it's a global question, right?
[04:52] I think if you talk to US investors, global investors, the same question hangs over US AI names. Can the mass investment they're making, which is about $500 billion of US,
[05:04] from analysts into AI, can companies monetize offers? So I think it's a global question for everyone. But one thing I would comment for China is that a lot of the investment in the US
[05:16] also has to do with the lack of infrastructure, energy shortage, debt offender. So for China, we have less of a problem. So we actually had an advantage in respect of that. Obviously, that's a bit of a shortcoming for us.
[05:32] How would you evaluate the mainland stock market performance since the start of 2026? It's something that we've been hoping for, expecting to see, and it's really coming through. And we think there's going to be more coming through. It's retail participation, it's animal spirit coming back in Chinese equities.
[05:48] because let's face it, interest rates in China are very low, and its retail deposits are generating only 1% return. The government bond deal is 1.8, not even 2%. So I think the reason why a lot of retail investors
[06:00] haven't gone back into the equity market is they felt scared, they didn't feel like it was money making. But now we've had two years of consistent performance in the equity market, so I do think that money generation effect will encourage
[06:13] more retail investors to come back into the equity market particularly on Asia Also we should expect insurance companies with the new the new premium allocation from last year premium sales it should come through
[06:30] into the equity market. And we also expect foreign institutional investors starting to allocate toward China, and that decision is usually made at the beginning of the year. So we think, first off, there's a lot of flows into the equity market propelling the market
[06:45] forward. What is the biggest concern that global institutional investors currently have about China equity? How do you address this? One thing that's attracted a lot of foreign investors to come back into China in the first phase is that previously a lot of investors worried about the systemic risks associated
[07:01] with the property balance and I think that's being removed. But the next wave I think we do need the consumer companies or consumer in general, consumption in general in China, start to come back in a big way and I think that will attract foreign
[07:15] capital. I think it's very clear Chinese companies are doing well globally. We are innovating. Our products are better than the TV. If you want to invest in the future, you don't want to invest in innovation. The Chinese equity market is definitely a good way to say that.
[07:31] I think the money making effects are there. I think definitely investors see the diversification that the Chinese equity market brings to their portfolio. And certainly when I speak to investors, I can see investors' interest growing for foreign
[07:45] interest growing in Chinese equities, particularly in our own investors, and I think that money will flow and eventually come back into Asia, just like what we've seen prior to 2024. You've added exposure to going abroad concept stocks like some industrials and materials
[08:01] names. Is that a tactical bet on a global cyclical recovery, or is it a strategic shift towards Chinese firms with global competitiveness? Last year we didn't have some of the growing global names because we were worried about
[08:13] But it turned out these companies, these growing global companies continue to be very resilient. These Chinese companies are doing well not because of their heat, but because the innovation is good enough to compete globally.
[08:25] For us, I think it's a structural trend that's going to continue. Yes, there will be uncertainties around geopolitics and tariffs, but that structural trend is going to continue.
[08:37] And one thing that we've found in some of these companies with high overseas exposure is that Rednecks has consistently outperformed the broader market. And they're outperforming because their products are good enough and they are the game share of the scene.
[08:52] So I think that trend will continue and also what we've observed recently, in 2025, their earnings growth has actually picked up, they've accelerated from the mentions of the stocks
[09:04] and that's why we've added these as one of our, the main themes for this year. UBS has constantly favoured internet, hardware tech and vocab. With valuations having risen, what do you think will be the next catalyst for these factors?
[09:19] And where do you see the most doable earnings flow? Well now, I think we feel very much like the hardware tech needs. And within those, very much the semiconductor equipment needs. Because I think you will have separate locations for the big trends the structural trend semiconductor localization And we think that will continue over the next three years
[09:42] And I think, to us, that trend is most probable. On the application side, we feel like the internet giants in China because I think they are the ones who are most likely monetized off the large language models,
[09:56] AI innovations. For internet, for example, we've had actually pretty tough competition within food delivery. So, to the extent there is some softening competition in the sector, I think that's helpful. Within brokers, for example, especially I feel brokers are very undervalued for China.
[10:11] If I look at the earnings growth for the broker sector, it's about 70, 80% growth the last year. If I look at the valuations, they're still around the same as the average. Nowhere near the past peak we have seen.
[10:23] So, to me, it's a cost-effective way to get into this feeder rally this very strong rate that was full market that we've seen in Chinese equity markets. You removed high dividend stocks from the specialist as yield to pass. In what market
[10:38] environment will defensive yield strategies become attractive again? We had this barbell strategy throughout last year and I think the year before that. We've taken off high dividend for a couple of reasons. One is that we're not expecting a lot
[10:56] interest rate reductions this year. And you'll find that typically, the high dividend names are just a substitute or a substitute for a bond asset. So, to the extent we don't get the same rate reduction,
[11:08] I think it makes the high dividend names less useful. Second thing is actually, because the high dividend names have done so well, and for me, we actually have done a historical analysis, and we found that the bar for high dividend names
[11:20] to perform well is about six percent dividend more. And beginning last year we could still find stocks, particularly financial stocks, that didn't hit the 10-year. Now, at the beginning of this year, we can find
[11:34] not a single financial stock that didn't hit the 10-year. So, the lack of stocks investing, I think that's another reason that suggests that maybe they'll take a break this year. And obviously we are positively buying the equity market.
[11:46] I think in a positive equity market environment, the growth names will outperform the stasis names. Looking down on 2026, what's actual or demographic trend in China is commonly underappreciated in China
[11:58] that could define the next investment decade? If we're talking next decade, I'd say it would be healthcare. It would be really fast. I mean, the population is really aging. And I think there's definite need for healthcare to healthcare services in China.
[12:13] And that need will only grow. And on top of it, we have seen biotech companies doing well last year. And I think we are also seeing innovation in the biotech companies, allowing them to compete globally.
[12:25] I think it would take time for some of the long-term money to build up the expertise of Chinese equities. And when that comes, I think we'll see a consistent flow of funds to support the healthcare market.
[12:39] Mr. Wong, thanks for joining us on Shanghai Eye. Great, thank you.