UBS sees 20% upside for China stocks on reflationary potential

Published Thu, Feb 26, 2026 · 05:13 PM

[HONG KONG] Chinese stocks may gain another 20 per cent as rising inflation expectations translate into better earnings, according to UBS Securities Asia.

A bottom-up survey of the brokerage’s sector analysts suggests that more Chinese companies are looking to raise prices this year due to higher input cost, while excess capacity is showing signs of improvement. A reflationary environment would drive a valuations re-rating and stronger earnings-per-share growth, potentially boosting the MSCI China Index by 20 per cent, UBS strategists said.

In the event of rising prices, “the potential share price reaction is weighed towards the upside given low expectations around reflation and low positioning of inflation related stocks” such as consumer, strategists led by James Wang wrote in a note on Thursday (Feb 26).

A reflationary environment could give Chinese shares another boost after a tech-driven rally lost steam this month. The MSCI China gauge has slid 5 per cent in February, erasing gains for the year, after a 40 per cent surge from a low in April. Chinese stocks have underperformed Asian and global peers this year.

The latest report reaffirms UBS’s bullish view on China. In November, the analysts expected the MSCI China gauge to hit 100 by the end of 2026.

Other major banks also have positive outlooks on local markets due to artificial intelligence and policy measures. In January, Goldman Sachs Group projected a 20 per cent climb for the Chinese index.

China’s producer price index has turned less negative, while corporate profitability are showing signs of improvements, Wang wrote. Bond yields have also crept up, signalling some expectations of reflation among investors, he added.

The analysts, however, noted that earnings expectations will be lowered if companies aren’t able to raise prices due to sales pressure, and lead to a 7-to-10 per cent downside for China stocks.

“The share market experience in Japan in 2022 suggests that the best performing sectors during reflation included materials, financials and property,” they said. For China, the earlier beneficiaries could include certain consumer sectors due to light investor positioning, they added.

The brokerage lifted property and consumer staples to neutral from underweight and cut the software sector to underweight, given lingering concerns around tech disruption and high valuation. BLOOMBERG