UBS Group published a research report indicating that uncertainty in the Hong Kong stock market is expected to increase next year, facing a challenging environment, with the target prices for the Hang Seng Index and MSCI Hong Kong at 0.02 million points and 8,400 respectively by the end of next year, reflecting generally flat index returns. The report states that the USA is still in a rate-cutting cycle, but UBS Group's attitude is cautious due to the potential imposition of 60% tariffs on Chinese goods and the potential geopolitical tensions in US-China relations. The economic team of UBS Group expects GDP growth in mainland China and Hong Kong to slow down. Due to rising geopolitical risks, the equity risk premium (ERP) may expand, presenting multiple downward reassessment risks for Hong Kong stocks.

The bank believes that the market has not fully reflected the geopolitical risks associated with Trump's return to power. Although the direct revenue exposure of local and mainland listed companies to the USA is relatively low (accounting for about single-digit percentages), the potential tariffs from the USA will impact the already weak Chinese economy and indirectly harm the Hong Kong economy.

The bank pointed out that it maintains a defensive stance before more stimulus measures are introduced in the mainland, including being bullish on beneficiaries of rate cuts, sectors with low correlation to the mainland economy, and certain real estate stocks that will benefit from population inflow. Additionally, it holds a cautious attitude towards the local retail house rental companies, mainly due to the potential depreciation of the RMB leading to increased spending by mainland consumers and a decrease in spending by visitors to Hong Kong.

However, UBS Group stated that by the end of next year, the Federal Reserve is expected to cut rates by a total of 150 basis points, and the bank prefers rate beneficiaries with larger floating debt exposures; moreover, due to the continuous inflow of talent and their families, it is expected to support housing demand, suggesting certain real estate stocks may have upside potential.

The bank has added Cathay Pacific (00293.HK) and CK Asset (01038.HK) to its focus stocks list, while removing Galaxy Entertainment (00027.HK) and AIA (01299.HK). Additionally, it has added Link REIT (00823.HK) and Wharf REIC (01997.HK) to its least favored list, alongside MTR Corp (00066.HK) and CK Asset (01113.HK).

UBS Group's updated list of focus stocks for Hong Kong is now as follows:

Stock | Investment rating | Target price (HKD)

Most preferred stocks list.

Hang Lung Properties (00012.HK) | Buy | 30 yuan

Sands China (00016.HK) | Buy (listed as core) | 102 yuan

PCCW (00008.HK) | Buy | 5 yuan

boc aviation (02588.HK) | Buy | 77.9 yuan

*CK Infrastructure (01038.HK) | Buy | 73 yuan

*Cathay Pacific (00293.HK) | Buy | 10.8 yuan

Sands China (01928.HK) | Buy | 24.8 yuan

Least favorite stock list

MTR (00066.HK) | Sell | 21.6 yuan

*Link REIT (00823.HK) | Neutral | 39.4 yuan

*Wharf REIC (01997.HK) | Neutral | 20 yuan

CK Asset (01113.HK) | Neutral | 31 yuan

*Newly added