This week's giant US$137 billion stimulus from Beijing made barely a ripple in markets, but UBS sees it as one of several underappreciated factors that could boost Chinese stocks and global demand for the mining sector in the coming year.
Mark Haefele, chief investment officer at the Swiss bank, suggests that the new round of fiscal stimulus could significantly benefit both the Chinese economy and investor sentiment.
The new round of fiscal stimulus is slated primarily for infrastructure and reconstruction efforts and, says Haefele in a blog, is a "strong swing in China’s fiscal impulse to a more pro-growth stance".
The additional spending is expected to lift the country's budget deficit from 3% to 3.8% of GDP and could lift 2024 GDP growth by 0.4-0.8 percentage points, his team estimates, thus increasing the chance of China outperforming the consensus 4.5% GDP growth forecast for next year.
Top leaders in Beijing are signaling their focus is on the economy and financial markets, and the extra spending comes after third-quarter GDP beat expectations and "confirmed a likely bottom to economic activity— suggesting policymakers are seeking to build on momentum to boost confidence", Haefele said.
The combination of more engagement from top leaders, improving economic data and a stronger policy response "could be a catalyst for equity markets in China", in UBS's view, with the MSCI China’s forward price-to-earnings now standing near 9x, compared to the 10-year average of 12x.
Chinese equity sectors poised to benefit include materials and industrials due to their direct links to infrastructure projects, as well as internet and consumer stocks.
"Outside China, increased raw material use should support commodity prices, boost global miners, and lift popular risk proxies like the Australian dollar," UBS said.