UBS analysts said they are raising their allocations to Chinese technology stocks after a sector-wide decline, arguing that earnings strength, cheaper valuations and advances in artificial intelligence set up the market for returns in 2026.
The bank highlighted two principal catalysts for a rebound: increased capital expenditure among local cloud and infrastructure providers, and broader AI capability development across Chinese companies. UBS noted that Chinese tech giants still deploy only a fraction of the capital expenditure that their U.S. counterparts do, and it expects domestic hyperscalers to announce expanded spending plans during the upcoming earnings season.
“While US investors have recently shifted to penalize capex acceleration, we believe China remains in a cycle where investors reward firms committed to capex growth,” the UBS analysts said.
Chinese technology shares listed in Hong Kong have underperformed since October, with the sector giving back roughly 20% from its October highs as concerns about aggressive AI spending overseas filtered through to local markets. More recently, the group came under pressure amid renewed worries that AI developments could upend traditional software businesses, particularly after startup Anthropic released a suite of new AI tools.
Counterbalancing those worries, a number of smaller Chinese AI-focused startups - including Zhipu, MiniMax, and Deepseek - have rolled out advanced AI models in recent months. UBS said that activity has helped lift sentiment around China’s longer-term AI prospects. “We expect to see more vibrant AI progress in China in 2026 - including more powerful foundational models and innovative applications,” the analysts added.
On portfolio moves, UBS increased its weighting in Tencent Holdings by 3 percentage points and added 1 percentage point each to Bilibili, Kanzhun, Meituan, NetEase and TAL Education Group. The bank trimmed its position in Vipshop by 3 percentage points and reduced New Oriental Education by 2 percentage points, alongside smaller cuts to Alibaba, Kuaishou Technology and Xiaomi.
The brokerage also took a more favourable view of China’s gaming sector, arguing that market fears about AI-driven disruption have been overstated. Gaming stocks had been hit earlier in 2026 after Google introduced Project Genie, described as a world model for building interactive virtual worlds, which stoked concerns that lower technical barriers could intensify competition.
UBS pushed back on that narrative by underscoring the value of incumbents’ user understanding, operational scale and intellectual property reserves. The bank said those attributes are not easily replicated by smaller developers and that leading gaming companies are more likely to benefit from AI tailwinds than be damaged by them.
Impacted sectors:
- Technology - broad exposure across software, platforms and cloud infrastructure
- Gaming - interactive entertainment and game development
- Consumer Internet and online services - including education and e-commerce platforms