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Investing.com - UBS has updated its investment framework for H-shares as southbound investors have increased their allocation towards Hong Kong equities to as much as 21% of Hong Kong free float.
The bank identified seven key factors driving H-shares in order of descending importance: policy and regulations, earnings (particularly revision trends), innovations, fund flows and interest rates, valuations, macro conditions, and geopolitics. Under this framework, UBS sees some near-term pressure on the Hong Kong market due to potential earnings downgrades resulting from competitive pressures in food delivery and other sectors.
UBS noted several changes in H-share investing compared to the past: markets have become more desensitized to geopolitics, flows (particularly southbound) and local liquidity now have a larger impact on index performances, correlation with global equity markets has declined, and economic factors have less impact as tech makes up a larger part of the index. Policy changes and EPS revisions remain crucial drivers.
Despite near-term headwinds, including UBS analysts’ forecasts implying 4% downside to HSCEI consensus earnings, the bank maintains an overall positive view for H-shares and China equity markets. UBS sees strong support for "dip buying" given attractive valuations, particularly for AI-related tech stocks, which are likely to draw continued southbound inflows.
For sector allocation, UBS continues to adopt a barbell approach, preferring select internet and tech stocks coupled with high dividend names. The bank also sees value in Hong Kong small-cap stocks as a potential convergence play, noting increased interest from southbound investors in recent months and significant outperformance of A-share small caps versus Hong Kong names over the last five years.
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