UBS holds an optimistic outlook about the performance of A-share companies this year on the back of expected improvements in profitability, stabilizing economic fundamentals and more supportive policies, analysts at the Swiss banking company said at a news conference on Monday.

The MSCI China Index is expected to jump 15 percent in 2024, propelled by the companies' 7 percent revenue growth and 10 percent earnings' increase over the next 12 months, said Eric Lin, head of UBS Greater China research.

In general, MSCI China companies' revenue is positively correlated to China's GDP growth.

Since China's GDP growth is estimated at 4.4 percent in 2024, the 7 percent revenue increase is attainable, said Lin.

Commodity prices will further decline in 2024. This will lower companies' costs and improve their profits marginally, he said.

The property sector's impact on the economy is likely to weaken in 2024, which is another positive factor in companies' profitability, he added.

The current price-to-earnings ratio of the MSCI China Index is eight. The low PE ratio of Chinese equities points to opportunities that can hardly be found in other markets, whether developed or emerging, Lin said.

On the outlook for the A-share market, UBS Securities' China equity strategist Meng Lei said that the "worst period is over" and they have changed to an optimistic tone for the following months.

The earnings per share of the blue-chip CSI 300 index is likely to be 8 percent in 2024, Meng said.

China's nominal GDP growth in 2024 — estimated at around 5.3 percent and higher than last year's 4.6 percent — will accelerate the rebound in A-share companies' profitability, he added.

Industrial companies' profits grew by 7.7 percent year-on-year in the third quarter of 2023, according to the National Bureau of Statistics.

This can be interpreted as the start of companies' profitability recovery, but such a recovery has not been reflected in the stock market yet, said Meng.

Other assets, such as government bonds, commodities and foreign exchange reserves, all seem to have been priced into China's economic recovery. However, it seems the Chinese stock market did not truly reflect the nation's stabilizing economic fundamentals last year, he said.

Going forward, China will introduce more solid supportive monetary, fiscal and property policies. There is still room for further lowering the reserve requirement ratio. The favorable policy environment will help drive up stock market performance, he added.

Meng further said that one major reason for the relatively lackluster performance of the A-share market last year was a lack of confidence, which was a result of the sluggish performance of mutual fund firms.

According to UBS' calculations, the top 100 heavyweights in mutual fund companies' portfolios have always outperformed the A-share average since 2010, with the year 2023 serving as the only exception.

The median stock price of these top 100 companies dropped 6 percent last year, while the median stock price of A-share companies climbed 4 percent during the same period.

The less-than-stellar performance of mutual funds has impaired investor confidence.

Retail investors would rather buy stocks on their own than direct their money toward mutual fund firms, giving a cold shoulder to new products from mutual fund companies. This has made it more difficult for mutual fund firms to receive new financing. The firms have to reduce their exposure to certain heavyweight stocks to manage risks. The net asset value of mutual fund products has thus been affected, creating a vicious circle, said Meng.

However, such a reduction in heavyweight stocks actually started in mid-2021 and may be approaching an end, Meng said. Therefore, investor sentiment may pick up in the following months, he added.

The benchmark Shanghai Composite Index dropped 1.42 percent to close below the 2,900-point level on Monday, while the Shenzhen Component Index shed 1.85 percent.

A-share listed semiconductor companies reported the biggest daily slump of 3.32 percent on average.

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