Investing.com -- UBS reiterated a Neutral stance on Chinese equities, citing geopolitical tensions and tariff volatility as key headwinds.

“We maintain a Neutral stance on Chinese equities amid significant uncertainty,” analysts wrote, noting that valuations have fallen close to levels seen during the first U.S.-China trade war under President Trump.

The bank notes that the MSCI China index now trades at a price-to-earnings ratio of 10.1, slightly above previous lows.

Despite some tailwinds, UBS believes macro and geopolitical issues could continue to outweigh structural growth narratives in the near term.

“While advancements in AI models position China prominently in the global innovation race, trade tensions may overshadow short-term market benefits from this segment,” UBS said.

Tariff escalation is also said to remain a central concern. The U.S. has increased tariffs on Chinese exports to 145%, while China has retaliated with a 125% tariff on U.S. goods.

UBS expects China may implement additional fiscal stimulus worth CNY 1–3 trillion (1–2% of GDP), aimed at stabilizing annual GDP growth at 4%.

“The size, magnitude, and speed of the rollout will determine whether markets view it as sufficient to partially mitigate tariff effects,” the firm noted.

UBS sees risks extending beyond trade into areas such as U.S.-listed Chinese ADRs, sector restrictions, and pension fund access.

They believe CNY depreciation could further complicate matters, potentially triggering capital outflows despite enhancing export competitiveness.

Amid these challenges, UBS suggests investors “wait for lower prices or better clarity on geopolitical tensions before increasing exposure,” and use market bounces to rotate into more defensive segments. For those still seeking exposure, UBS recommends “positions in high-yielding sectors such as financials, energy, utilities, and telecoms.”

Despite near-term caution, UBS remains optimistic about China’s long-term AI ambitions and government support for innovation.