(Yicai) July 1 -- Mainland China’s stock market may experience short-term volatility in the second half of this year, but there is potential for a rebound in the medium-term, a China equity strategist at UBS Securities, the Chinese brokerage arm of Swiss banking giant UBS, said at a media briefing yesterday.

The CSI 300 Index, which tracks the performance of the top 300 stocks traded on the Shanghai and Shenzhen stock exchanges, is expected to deliver earnings growth of around 6 percent, while the valuations of mainland-listed stocks remain at historically low levels, Meng Lei said.

Before 2021, the CSI 300 used to trade at about a 20 percent premium over the MSCI Emerging Markets Index. Now it is trading at a 12 percent to 13 percent discount, Meng said. Assuming that the liquidity environment stays loose, which leaves room for more interest rate cuts and reductions in the reserve requirement ratio, and assuming that trade tensions do not flare up again, UBS Securities believes there is still room for valuations to improve modestly.

Potential catalysts for a revaluation could include looser macroeconomic policies, more medium- to long-term capital flows into the market and broad-based structural reforms, he added.

Taking into account capital flows and the macro backdrop, Beijing-based UBS Securities recommends a diversified investment strategy, he said. Cyclical sectors should perform well if trade tensions ease and policy support strengthens. However, if the trade rift worsens and policy support stays moderate, high-dividend defensive stocks might do better.

Based on current baseline assumptions, investors should look at exchange-traded funds that are linked to the CSI 300, high-dividend stocks and small- and mid-cap companies as well as opportunities in the Hong Kong stock market, Meng said.

For overseas investors, they can select artificial intelligence-related firms listed in Hong Kong through southbound capital flows, which refers to capital flowing from the mainland to Hong Kong, or they can pick individual mainland stocks with strong ties to AI. Alternatively, they can invest through indexes such as the CSI 1000 or small-cap indexes to tap into the AI theme.

Editor: Kim Taylor