(Yicai Global) July 25 -- UBS analysts anticipate a 10 percent increase in the earnings of companies listed on China’s stock market, given that stock prices have already factored in the second quarter’s economic slowdown and the expected recovery over the next six months.

Commodity prices are expected to fall further in the six months ending Dec. 31, and the profit margins of downstream companies will expand, which will have a positive effect on Chinese mainland shares, Meng Lei, a China equity strategist at UBS Securities, said at a press conference.

UBS predicts that China’s benchmark loan prime rate will be cut by another 10 basis points in the second half, and that a lowering of the reserve requirement ratio is also possible. These measures would release more funds toward the real estate sector, easing the financing pressure on developers.

Moreover, some Chinese cities have relaxed home purchase restrictions, cut their down payment requirements, and trimmed the interest rates on outstanding mortgages. These factors may help the market stabilize and rebound, UBS added.

“Confidence in the future, both at the macro level and at the enterprise level, is the key driver of capital inflow into the market,” Meng said. He expects more policies to support private businesses and the real estate market, which will ultimately boost the overall market recovery.

Meng said that if the policies are moderate, UBS has a positive outlook on some sectors that are indirectly related to real estate, such as home appliances, food, and beverages. He also recommended insurers and utilities as defensive stocks.

For example, Meng said that if the policy stimulus becomes stronger, some funds will shift from artificial intelligence and digital economy firms, which had high stock prices in the first half, to the pro-cyclical sector. He advised investors to be selective.

Editor: Peter Thomas