UBS's Defensive Strategy for Chinese Equities Amid US-China Trade Tensions

The U.S.-China trade truce, now in its final weeks before its August 12 expiration, has provided a fragile reprieve for investors in Chinese equities. Yet, with tariffs still averaging 30% on Chinese goods and geopolitical risks simmering, the path forward remains fraught with uncertainty. In this environment, UBS's strategy for investors centers on sector-specific opportunities in high-dividend industries—utilities, energy, and banks—while navigating the volatility of tech and trade-exposed sectors. Here's how to position for resilience.

The Defensive Case for High-Dividend Sectors

Chinese equities, particularly in utilities and energy, offer a 4% dividend yield gap compared to global peers, a compelling anchor in turbulent markets. State-owned enterprises (SOEs) dominate these sectors, benefiting from stable cash flows and government support.

Utilities:
- Key Play: Companies like China State Grid and China Southern Power Grid offer dividends yielding ~5-6%, backed by regulated monopolies and government-backed infrastructure projects.
- Why Now: Utilities are less exposed to trade tariffs and U.S. tech restrictions. Their earnings are insulated by domestic demand, even as exports face headwinds.

Energy:
- Key Play: State-owned oil majors like China National Offshore Oil Corporation (CNOOC) and Sinopec provide dividends of ~4-5%, leveraging China's energy security priorities.
- Risk Mitigation: While global oil prices are sensitive to geopolitical tensions, China's domestic consumption and energy transition (e.g., renewables) offer a floor.

Banks:
- Key Play: Mega-banks like Industrial and Commercial Bank of China (ICBC) and Agricultural Bank of China yield ~4-6%, supported by steady loan portfolios and government liquidity backstops.
- Caveat: Monitor debt risks in China's property sector, which still weigh on bank balance sheets.

Navigating Geopolitical Risks

The trade truce's expiration looms large, with tariffs set to revert to 34% unless extended. UBS advises investors to:
1. Hedge against tariff reversals: Focus on companies with domestic revenue streams (e.g., utilities) or those exporting to markets outside the U.S. (e.g., Southeast Asia).
2. Avoid tech sectors exposed to U.S. sanctions: Sectors like semiconductors and AI face heightened risks from export controls.

Tech Resilience: A Nuanced Play

While U.S. tariffs on Chinese tech goods (e.g., semiconductors, EVs) remain elevated, UBS sees pockets of resilience in niche areas:
- Consumer tech: Companies like TCL or Haier, focused on home appliances and global supply chains outside U.S. reach.
- AI and cloud services: Alibaba Cloud and Baidu are expanding into African and Southeast Asian markets, less dependent on U.S. partnerships.

Domestic Fundamentals: Weak Consumption, But Structural Shifts

China's domestic economy faces challenges:
- Weak consumption: Retail sales grew just 0.5% year-over-year in June, reflecting cautious spending.
- Debt concerns: Local government debt and property sector liabilities remain unresolved.

Yet, UBS highlights structural tailwinds:
- Dual Circulation Strategy: China's push for self-reliance in tech and energy is boosting SOEs in utilities and infrastructure.
- Monetary easing: The People's Bank of China's recent rate cuts aim to stabilize growth, benefiting banks and utilities.

Investment Takeaways

1. Overweight utilities and energy: Their dividends and domestic focus offer a hedge against trade volatility.
2. Underweight tech exposed to U.S. tariffs: Postpone bets until clarity on the truce extension.
3. Monitor the August 12 deadline: If tariffs rise, defensive sectors will outperform.

Final Note: The 4% yield gap presents an attractive entry point for long-term investors, but pair equity exposure with cash reserves to weather near-term volatility. As UBS's strategy underscores, patience and sector selectivity are key to thriving in this high-risk, high-reward environment.

This analysis assumes no changes to current sanctions or geopolitical dynamics. Investors should monitor U.S.-China negotiations closely.