Despite the less-than-promising macro backdrop and the uncertainty caused by US-China trade tensions, onshore Chinese equities have rebounded by over 30% this year and outperformed other Asia markets.
UBS CIO Global Wealth Management remains overweight offshore Chinese equities versus onshore stocks, but it is positive on the onshore market given the steady rise in company earnings, northbound inflows and proactive government policies.
In fact, CIO analyst Eva Lee expects earnings growth to be at high-single-digit level in the next 6-12 months. And earnings, she said, would be a key catalyst for A-share performance.
"The resilient rise in corporate earnings, in our view, stems from the better-than-expected performance of financials, the impressive growth of the new economy and continued sector consolidation that has benefited industry leaders," Lee noted in the latest report on Chinese onshore equities.
Financials contribute to around 70% of China A-share (CSI 300 index) earnings, delivering a 17% year-on-year growth by 3Q19 and boosting the overall A-share earnings picture.
Lee added that the recent outperformance of China financials should continue as their earnings growth exceeded expectations, investor are rotating from high-growth/valuation names to value/yield stocks, and their valuations are still attractive.
In addition to financials, consumer is another sector that is likely to outperform due to interest from northbound investors.
Following two consecutive months of outflows, northbound flow is bouncing back strongly in the third quarter, which recorded an inflow of USD 13bn, and they're mainly positioned in the financial and consumer sectors.
"The internationalization of Chinese onshore equities is an inevitable trend, in our view," Lee said. She expects northbound capital to grow to USD 160bn in the next 6-12 months due to higher A-share weighting in MSCI indexes.
Lee added that consumer discretionary is expected to receive support from the recovery in property completion, continued consolidation and supportive government policies.
Finally, the IT and healthcare sectors are also set to benefit from the inflow of foreign capital, and they typically outperform the overall market during a rising Consumer Price Index (CPI) cycle.
"Foreign capital has concentrated in new economy sectors, including consumer, healthcare and IT, and select old economy sectors such financials. Our belief that this trend will continue underpins our onshore positioning," Lee noted.By UBS