Chinese stocks will struggle against persistent economic and market headwinds, and any recovery will be sluggish despite policy support from the government, UBS says

• A positive inflection point for China's markets and the economy "is still some way off," despite Beijing's economic stimulus efforts, said UBS. 
• China's central bank recently freed up about $70 billion in liquidity. 
• Rising COVID infections are a drag on the world's second-largest economy.

Chinese stocks are unlikely to swing sustainably higher as rising COVID infections offset the impact of the government's efforts to push against the slowest economic growth in years, said UBS Global Wealth Management. 

The firm outlined recent efforts by Beijing to support the world's second-largest economy, which is coming into greater focus in international markets as protests in the country against COVID-19 restrictions accelerate. 

Last week, the People's Bank of China freed up roughly 500 billion yuan ($69.4 billion) in liquidity for the economy by cutting the reserve requirement ratio for most banks by 25 basis points.

The central bank also plans to extend cheap loans to financial firms for buying bonds issued by property developers, Reuters reported. And according to Bloomberg, six major state-owned commercial banks have pledged about $179 billion in financing support for property developers. 

"But despite the latest moves, a positive inflection point for the Chinese economy and markets is still some way off, in our view," Mark Haefele, chief investment officer at UBS Global Wealth Management, in a note published Monday. 

"Policy support remains focused on stabilizing the economy, rather than spurring growth, in our view. As a result, we remain neutral on Chinese equities. We also view China's sluggish recovery as a risk for the global economy and markets," said UBS in recommending investors focus on defensive equity and fixed-income assets.

Major Chinese equity indexes have dropped this year on a mix of investor concerns, including China heading for the smallest economic expansion in three decades. China's gross domestic product grew 3.9% in the third quarter. The Shanghai Composite has fallen by more than 15% and Hong Kong's Hang Seng Index has stumbled by 26%.

UBS said a major hurdle for the Chinese economy is rising COVID-19 infections, with daily cases of 32,000 higher than the roughly 29,000 seen in mid-April during a lockdown in Shanghai, the country's largest city. 

"It is also concerning that the rise in infections has been widely spread, so this wave could be more harmful than the one in April, in which cases were concentrated in Shanghai. This has led to a tightening of restrictions," said Haefele.

Among the restrictions, Shanghai has barred new arrivals into the city from going to restaurants, markets, and other entertainment venues for the first five days.

"We don't expect a full reopening until around the third quarter of next year," he said.  

So far, supply-chain problems have been less severe than during the COVID-19 outbreak in April because the wave hasn't extended to China's major ports or manufacturing hubs, Haefele noted. But risks remain that they could worsen if the outbreak spreads, potentially affecting exports of machinery and household appliances, said UBS. 

In rare public displays of dissent, thousands of people across China have been protesting the country's zero-COVID policy that calls for lockdowns when infections are detected. Meanwhile, hundreds of workers have clashed with security guards at the largest iPhone production plant in China. Apple faces a potential hit of up to 10% on iPhone production stemming from protests in China, Wedbush said Monday. 

As for China's property sector, UBS said government support there appears "sufficient to limit the damage" rather than stoke faster growth. 

"In our view, recent policy initiatives will give property developers more time to cope with maturing US dollar debt. However, this is not likely to lead to a resurgence of property sales," it said, adding that the sector will likely act as a drag on the broader economy absent a recovery in demand.