UBS reiterates its bullish view on the Chinese stock market in 2026: the potential for further inflation to become a new engine. The MSCI China Index is expected to rise by 20%.

UBS Securities Asia has stated that as inflation expectations heat up and stronger corporate profits, the Chinese stock market may have another 20% upside potential. Research conducted by the brokerage firm on industry analysts shows that due to rising input costs, more and more Chinese companies plan to raise prices this year, while signs of improvement in overcapacity are becoming apparent. Strategists have indicated that a reflationary environment will drive a revaluation of valuations and stronger earnings per share growth, potentially leading to a 20% increase in the MSCI China Index. Strategists led by James Wang wrote in a report on Thursday that in a scenario of rising prices, "given the market's low expectations for reflation and lower positioning in inflation-related stocks (such as consumer stocks), potential stock price reactions are more biased towards the upside." After losing momentum in the tech-driven rebound earlier this month, the reflationary environment may provide new impetus for the Chinese stock market. The MSCI China Index dropped 5% in February, wiping out year-to-date gains, after a 40% surge from its April low. The latest report reiterates UBS's bullish view on the Chinese market. Analysts at the bank projected in November last year that the MSCI China Index would reach 100 points by the end of 2026. UBS has upgraded the real estate and essential consumption sectors from underweight to neutral, while downgrading the software sector to underweight due to risks of AI disruption and concerns about overvaluation. James Wang pointed out that China's Producer Price Index (PPI) decline has narrowed, and signs of improved corporate profitability are emerging. He added that bond yields have also risen, indicating investor expectations of reflation to some extent. However, he also noted that if companies are unable to raise prices due to sales pressure, profit expectations would be downgraded, potentially leading to a 7% to 10% decline in the Chinese stock market. UBS strategists stated: "The experience of the Japanese stock market in 2022 shows that sectors performing well during the reflationary period include commodities, finance, and real estate." They pointed out that in China, with investors having lighter positions, some consumer sectors may benefit earlier. It is worth mentioning that under the drive of AI and policy incentives, other international major banks also have a positive outlook on the Chinese stock market. Goldman Sachs forecasted in early January that the MSCI China Index would reach 100 points by the end of 2026, a 20% increase from the level at the end of 2025; the Shanghai and Shenzhen 300 Index is expected to rise by 12% to 5200 points by the end of 2026. The bank's strategists said that the improvement in corporate earnings will primarily drive the returns in the Chinese stock market in 2026. With the joint support of AI development, companies going global, and policies against "involution," earnings growth is expected to increase from 4% in 2025 to around 14% in 2026 to 2027.