UBS says this is how to play China right now — and shares its top stock picks

Published Wed, Aug 30 20238:15 PM EDT

Lucy Handley @in/lucy-handley-b2b0a61a/@lucyhandley

Analysts at UBS have detailed how to play a volatile Chinese market in the short term. "Under our expectation for further policy support that will be both effective and rolled out promptly, Chinese equities remain most preferred within our Asia strategy," the bank's analysts said in an Aug. 25 note to investors. "Key policy-related items to watch for include actual implementation of policies, especially in property easing, consumption stimulus, private sector support, and plans to resolve local government financing vehicle (LGFV) debt issues," the analysts wrote. UBS recommended that investors hold on to "recovery beneficiary sectors," such as the internet and consumer industries, as well as high-yield defensive stocks like utilities, banks and insurers, "over the near term to navigate through market volatility." Defensive stocks are those seen by investors as less risky and able to withstand downturns. Chinese internet giant Alibaba is on UBS' list, with the bank expecting it to grow faster than the overall Chinese stock market. "Potential stock price catalysts include growth from the cloud business, overseas expansion and greater operational discipline," the analysts wrote. Search company Baidu is also recommended by the bank, which expects its ad revenue to grow. "Potential separate listings or asset sales of Baidu's non-core businesses could be another catalyst to unlock shareholder value," UBS said. In the financial sector, Ping An Insurance makes UBS's list, with the bank expecting it to benefit from China's financial reforms. "China will likely push forward tax benefits to enhance the old-age protection system, which means the long-awaited pension reform may be implemented. Insurers with full pension licenses, such as Ping An, will likely enjoy a first mover advantage," the analysts wrote. Consumer stocks In consumer stocks, UBS likes Topsports International , which is Adidas ' largest retail partner globally, the bank said. "As lockdowns were lifted, demand has rebounded well, and we expect sales in 2H to rebound to robust levels," UBS stated. Shenzhou International , a clothing manufacturer for the likes of Nike and Uniqlo, is recommended by UBS for its likely market share gains. "Branded companies are increasingly relying on their suppliers for high-quality products," UBS's analysts wrote. "We believe Shenzhou's strong position in the value chain could drive a further share price rerating," they added. The bank also likes Yum China , operator of KFC and Pizza Hut, stating: "We favor Yum China for management's plans to further revitalize the brand, to increase its dominant market share in the fast-food market, and to open more stores. Also, the company has leveraged its apps to expand its delivery business." Utilities names In utilities, wind energy giant China Longyuan Power Group makes the UBS list. "Underlying fundamentals remain robust based on recent results and we like the company's aggressive expansion which seeks to triple capacity from 2020–2025," the bank said. UBS also likes coal and wind company China Resources Power , stating: "CR Power is a clear beneficiary of the peak-trough power pricing policy. The policy allows power generators to charge higher tariffs at demand-peak periods, instead of flat charges." China's economy has slumped in recent months , with industrial production and retail sales underperforming and a fall of 0.3% in its headline consumer price index. However, positive news out of China has helped stocks move higher, with the Chinese government cutting stamp duty on stock trading and U.S. Secretary of Commerce Gina Raimondo arriving in the country on Monday for talks with senior officials . — CNBC's Michael Bloom contributed to this report.