UBS Flags Buying Opportunity in Chinese AI Stocks After Selloff

A significant selloff in Chinese markets has created an attractive entry point for investors in artificial intelligence-related technology hardware stocks, according to a new analysis from UBS. The bank highlights that while China’s major indices have fallen 18% year-to-date, the country's AI hardware stocks have seen only modest gains, presenting a potential opportunity.

Valuations Hit 'Historical Lows'

UBS notes that valuations for Chinese AI tech hardware stocks are now near historical lows, implying that a major slowdown in earnings growth is already priced in by the market. The bank's analysis suggests current valuations anticipate a 50% to 60% growth slowdown in 2027 and reflect a 20% to 30% downside to consensus earnings estimates.

This pessimistic outlook is reflected in the broader market, with the MSCI China's 12-month forward price-to-earnings (P/E) ratio at 9.5 times, or 1.2 standard deviations below its historical average. UBS argues that the fundamental concerns driving this sentiment appear "overdone."

Strong Earnings vs. Negative Sentiment

Despite the bearish positioning, the underlying fundamentals for these companies remain robust. According to UBS, most AI tech names have seen earnings upgrades of 12% to 15% over the past three months, even amid component shortages in the country.

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Investor sentiment, however, has soured. UBS pointed to several indicators of this trend:

• Short interest in Hong Kong equities has reached its highest level.
• Hedge funds have largely unwound their positions in AI tech hardware, with net positions returning to year-start levels.
• The margin financing balance on A-shares has also fallen below where it started the year.

An Opportunity for a Rebound?

UBS's historical data suggests that when valuations for these stocks previously reached similar lows, they went on to gain more than 50% on average over the following 12 months. Based on this analysis, the bank recommends a "barbell strategy" for investors, with AI tech hardware and banks as its preferred sectors.

Among its preferred technology selections, UBS specifically named NAURA Tech, CXMT, and SMIC as potential opportunities for investors.