(Bloomberg) -- UBS Group AG upgraded its recommendation on Chinese equities to overweight from underweight, saying tighter economic regulation has been priced in, while corporate earnings and valuations are set to improve.

Strategists Niall MacLeod, Karen Hizon and Jiamin Shen made the U-turn after maintaining a downbeat call for about a year and a half as China’s economy rose out of its Covid-induced trough before slowing again.

The nation’s economic “policy is already moving through its tightest point” and earnings should bounce back next year, as cyclical upgrades in the rest of the region and weak earnings in Chinese internet stocks fade, they wrote in a note.

The change in view comes after Hong Kong’s Hang Seng benchmark became one of the world’s worst-performing major equity gauges this year, and after Beijing’s regulatory crackdown at one point erased more than $1 trillion from the market value of Chinese stocks listed globally.

Sentiment has improved markedly in recent weeks as investors speculate the worst of the regulatory onslaught might be over and as some stock indexes saw bullish technical patterns. 

In other key changes, UBS downgraded Australian equities to underweight and Japan and Korea to neutral, citing a peak in some cyclical data points and valuations. It has a strong preference for Southeast Asian stocks over most other Asian markets, saying it is “sanguine about the potential for Asean to withstand higher yields.”

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