China's Economic Stimulus Measures

Analysts at UBS have described China's recent stimulus measures as "a step in the right direction" for its economy, but noted that they remain "small."

Chinese officials have implemented a series of actions over the past month aimed at revitalizing economic activity, addressing a decline in the property market, and enhancing infrastructure development. A recent action by the People’s Bank of China (PBOC) involved cutting its one-year and five-year benchmark loan prime rate (LPR) by 25 basis points on Monday. The LPR serves as a benchmark for lending rates in China and is determined by the PBOC based on input from 18 designated commercial banks.

In response to these policy changes, UBS strategists have raised their forecast for China’s gross domestic product (GDP) this year from 4.6% to 4.8%. However, this projection is still below Beijing's target of 5%.

UBS analysts also pointed out that nominal GDP, reflecting finished goods and services at current market prices, is expected to remain "weak" at 4.1% year-on-year. They highlighted ongoing issues, such as high overcapacity in many manufacturing sectors and warnings about the country's overheated and excessively priced real estate market.

They mentioned, "The scale of excesses will take a long time to resolve."

Despite these concerns, UBS analysts maintain a "tactically overweight" stance on Chinese equities, asserting that these stocks present value comparable to corporate bond yields. They noted improving earnings revisions relative to global markets and suggested that more support measures might emerge from Beijing.

The analysts displayed a particular preference for copper, describing it as the commodity with the "least sensitivity" to fluctuations in the property market, while they hold an underweight position on luxury stocks. Given that China is a crucial market for high-end goods, such companies are particularly susceptible to the broader economic slowdown.

They warned that US consumer brands like Nike, Deckers, Apple, and Starbucks may also be "highly vulnerable" to the economic challenges in China and potential increases in US import tariffs following the upcoming US presidential election in November.