What is the best way to gain exposure to anti-involution campaign in China?

UBS recommends selective exposure to China's ongoing "anti-involution" campaign, which aims to address overcapacity, despite existing market skepticism. The firm identifies solar, chemicals, and lithium as the sectors best positioned to benefit, citing factors such as low profitability, valuation, and long-term growth potential. UBS views these regulatory actions as less intrusive but broader than previous efforts, believing future policies are likely to be pro-growth and pro-inflation, projecting average sector upside at three times the downside if historical margins and valuations return.

Analysis

According to a research note from UBS, China's 'anti-involution' campaign presents a selective investment opportunity despite prevailing market skepticism. The firm identifies solar, chemicals, and lithium as the primary beneficiaries, citing a compelling risk-reward profile. For the solar sector, UBS notes the ban on selling below cost, combined with very low current profitability and long-term growth potential. In chemicals, the rationale is based on low valuations, with price-to-book ratios near historical troughs, and the potential for supply-side discipline through the review of outdated capacities. The lithium sector is favored for its strong long-term growth outlook and an asymmetric risk-return profile, supported by stricter mining enforcement. UBS characterizes the current regulatory push as broader in scope but less intrusive than the 2014–2015 episode. The firm maintains a bullish outlook, anticipating future policies will be pro-growth and pro-inflation, and projects that a return to historical margins and valuations could yield an average sector upside that is three times the potential downside.

Key Decisions for Investors

• Investors could consider initiating or increasing exposure to Chinese solar, chemical, and lithium equities, as these sectors are identified by UBS as having the most favorable risk-reward from the country's 'anti-involution' policies.
• Given that the market remains skeptical, this strategy represents a contrarian view that requires monitoring for evidence that the regulatory actions are effectively addressing overcapacity and improving sector profitability.
• The investment thesis is predicated on an asymmetric return profile where potential upside is estimated at three times the downside, making it suitable for investors with a medium-term horizon and a tolerance for policy-driven risk in emerging markets.
• Key catalysts to watch for include further pro-growth policy announcements from Beijing and tangible improvements in sector margins, which would validate the bullish outlook.