UBS lifts China internet to No. 2 tech allocation on easing

UBS Wealth Management raised China internet stocks to its No. 2 tech sector allocation, behind semiconductor equipment, citing accelerating fiscal spending.

"UBS expects China's fiscal spending to accelerate in 2H26, including the deployment of RMB800 billion in new policy-based financial instruments," the bank's Chief Investment Office Asia Pacific said.

The upgrade moves internet from fifth to second place in UBS's China tech allocation. About 60 percent of the full-year RMB11.9 trillion government bond issuance quota remains unused, the bank said. UBS kept its China GDP growth forecast at around 4.5 percent.

UBS said internet valuations remain near historical lows, while improving earnings expectations should narrow valuation discounts. The bank maintained an "attractive" view on the RMB, targeting USD/RMB at 6.7 by year-end and 6.5 by mid-2027.

The July Politburo meeting called for more proactive fiscal policies and left room for further easing if growth does not improve, UBS said. The bank expects upcoming corporate results from China internet names including Tencent to provide clearer guidance on accelerating cloud business growth, AI monetization and core business margin trends. Continued share buybacks, potential AI asset spin-offs and a stabilizing regulatory environment are also expected to support internet stocks, UBS said.

UBS continues to view semiconductor equipment as its top tech sector pick, expecting the segment to benefit from domestic substitution, technological advances and strong demand from domestic foundries and memory chip makers. The bank is also optimistic on power equipment, healthcare, and high-dividend defensive stocks including banks, insurers, utilities and consumer staples.

On bonds, UBS favors Asian investment-grade and high-yield bonds, preferring short-to-medium maturities to reduce the impact of interest-rate fluctuations while generating stable coupon income. On foreign exchange, UBS said RMB performance will still depend on the USD trend. If the Federal Reserve maintains a hawkish stance or raises interest rates, the pace of RMB appreciation may slow; if the USD weakens, momentum for RMB appreciation will strengthen.

The upgrade reflects growing institutional confidence in China internet stocks, potentially driving capital inflows into major Chinese tech names as fiscal stimulus accelerates. Investors will watch upcoming earnings from Tencent and other internet leaders for cloud growth and AI monetization guidance.

This article is for informational purposes only and does not constitute investment advice.