UBS Analysis Points to 10% Rise in MSCI China Index Through Profit Growth and ROE Improvements

Profit Growth Fuels Optimism for Chinese Stocks

The MSCI China Index is projected to rise by b as much as 10% over the next three to six months, driven by improvements in profit growth and increased corporate buy-backs, as suggested by UBS Group. James Wang, head of China strategy at UBS, indicated that an average of 7% profit growth is anticipated in the second half of the year, which, alongside valuation expansion, will positively impact the index.

Importance of Return on Equity

Wang emphasizes the significance of return-on-equity (ROE) as a pivotal metric for assessing the performance of state-owned enterprises (SOEs) and new economy sectors. Despite an uncertain economic outlook, he believes that ROE improvements are key to stock market performance rather than GDP growth.

• Stock market gains increasingly depend on ROE metrics
• ROE in emerging industries like renewable energy is lagging behind traditional sectors
• Stock repurchases and dividends are on the rise

The MSCI China Index, which includes 655 companies with a total market value of US$1.85 trillion, has faced headwinds due to economic instability and property sector challenges. However, ongoing reforms targeting ROE metrics provide a promising outlook.

Strategic Changes in Stock Buy-Backs

With share buy-backs tripling year-on-year, and many companies planning to increase dividends, the shift toward prioritizing return-on-equity could spark significant market benefits. The efforts by regulators to instill confidence among investors further supports this strategy.