Chinese Markets in Turbulence and Opportunity: 2025-26

As global macroeconomic forces converge with the evolving geopolitical landscape, Chinese markets are poised for turbulence and opportunity in 2025-26.

UBS has outlined five possible global scenarios that could directly impact China's economic prospects and market performance:

1. U.S. election blue sweep: Optimism for Chinese markets

A Democratic Party victory across both the presidency and Congress, known as a Blue Sweep, is expected to usher in the most favorable scenario for Chinese equities.

Analysts at UBS project that a Blue Sweep will reduce U.S.-China trade tensions by promoting a stable policy environment with fewer disruptions. The absence of new tariffs and improved diplomatic relations would encourage market optimism, leading to robust gains in MSCI China driven by improved investor confidence and recovery in earnings.

2. Red sweep: Risks of renewed trade frictions

In contrast, a Republican victory—a Red Sweep—could reignite trade tensions.

UBS analysts warn that such a shift may result in tariff reinstatements or new protectionist policies targeting Chinese exports. Sectors tied to clean energy, such as solar, could face challenges. Under this scenario, UBS projects that Chinese equities could suffer a 9-15% de-rating due to heightened uncertainties and possible retaliatory measures from China.

3. Global tariffs: Challenges ahead

A broader increase in global tariffs presents a disruptive outlook.

UBS expects negative returns across most markets under this scenario, with impacts stretching into 2026. For China, the imposition of new tariffs would trigger structural challenges, including dampened export growth and strained corporate earnings, weighing heavily on investor confidence.

4. U.S. recession: Global spillover and domestic resilience

A U.S. recession would have mixed implications for Chinese markets. While global equities may experience a sharp sell-off, China’s proactive fiscal and monetary policies could help shield the economy, leading to a mild recovery in 2026 despite broader market struggles.

5. Premature central bank easing: Interest rate pressures mount

The final scenario envisions global central banks easing monetary policy prematurely, only to reverse course as inflation persists.

UBS analysts expect valuation pressures across equity markets, including in China, due to higher interest rates impacting corporate borrowing costs. While nominal growth may continue, rising inflation could curb market momentum in the near term.