UBS: Remains optimistic about large Chinese internet stocks in Hong Kong, new additions to the simulated portfolio include JD.com and Baidu

UBS published a strategy report on the Chinese market, stating that since the outbreak of the conflict in Iran, the MSCI China Index has outperformed global indices by about 1.4%, while A-shares have shown greater resilience, with the CSI 300 Index remaining basically flat during this period. The bank believes this further proves that the Chinese stock market offers a viable diversification option for global investors. From a fundamental perspective, recent geopolitical events pose relatively limited downside risks to the Chinese market for several reasons: 1) China's dependence on oil is low, accounting for only about 20% of total energy consumption; 2) it has ample oil reserves (approximately 4 months or 1.3 billion barrels); 3) due to the government's pricing mechanism, the rise in oil prices has not fully transmitted to downstream customers; 4) higher input costs may drive up PPI and price expectations, which could be beneficial in the current deflationary environment.

In terms of market selection, the bank prefers A-shares for several reasons: 1) potential government capital entering the market provides downside support; 2) compared to H-shares and ADRs, A-shares have a lower correlation with global indices; 3) abundant liquidity; 4) benefiting from policy support. Within A-shares, the bank favors sectors including hardware technology, non-ferrous metals, internet, electrical equipment, brokerage firms, and "going abroad" related stocks.

UBS believes that higher input costs are not necessarily a bad thing. Although higher input costs may compress corporate profit margins, the negative impact on Chinese companies is relatively small. Historically, PPI has been highly correlated with corporate revenue, and an increase in PPI (or a narrowing decline) often leads to accelerated revenue growth, thereby creating a positive leverage effect on profits. Additionally, multiple industries are already seeking price increases, and rising oil prices may provide more momentum for this (such as in the chemical industry). If investors believe that the Chinese economy can continue to enter an inflationary environment, stock prices may have upward potential.

In A-shares, the bank prefers hardware technology, non-ferrous metals, internet, electrical equipment, brokerage firms, and "going abroad" related stocks. In H-shares, the bank continues to be optimistic about large internet companies and has added JD.com-SW (09618.HK) and Baidu-SW (09888.HK) to its model portfolio due to their low holding ratios, low valuations, and proactive shareholder return measures