(Yicai Global) July 7 -- Chinese stocks have been outperforming global markets since June and constituent stocks of the MSCI China Index, which tracks the Chinese market, could realize an upside of 10 percent this year, referring to their potential appreciation in value, Swiss banking giant UBS said in a research note yesterday.

MSCI China did better than the US’ S&P 500 by 15 percentage points in the month up to June 23, according to UBS’ latest market watch report. China’s headline inflation is low, travel curbs are easing, supply trends are improving, the regulatory clampdown seems to have ended, valuations are at a discount compared to the US and the property market may have bottomed out.

In a base case scenario, UBS expects China's GDP growth rate to be between 3 percent and 4 percent this year and the earnings growth rate for listed companies to be around 10 percent, giving MSCI China an upside of 7 to 10 percent, it said. Bullish sectors in the short-term include consumption, digital economy, auto and renewable energy.

China looks set to continue monetary easing to shore up employment and consumption, the Zurich-based lender said. The economy is therefore poised for a policy-led recovery in the second half, versus a slowdown in the US and other G10 economies, which could spur Chinese stocks to continue outperforming their global peers.

The increase in China's consumer inflation and producer price index, a gauge of industrial profits, is relatively moderate compared to the rest of the world, said UBS Wealth Management Asia Pacific Investment Director Hu Yifan.

However, given that monetary policy is tightening globally, China is less likely to cut interest rates in the second half, although it could still reduce the reserve requirement ratio in order to maintain a relatively easy monetary and credit policy, Hu added. The country's fiscal policy will also continue to play a supportive role.

Editor: Kim Taylor