According to a research report from UBS, concerns about AI fundamentals have been overly exaggerated, and valuations of Chinese AI tech hardware stocks have fallen close to historic lows, with the risk-reward profile once again becoming attractive.

UBS noted that following the recent tech-led correction, major Chinese indices have declined 18% year-to-date, while AI-related tech hardware stocks tracked by the bank have gained only 9% this year. The bank believes investor attention may pick up as they reposition their portfolios for the new year toward year-end.

The bank also pointed out that earnings growth for tech hardware remains strong, with earnings forecasts for most AI tech stocks revised upward by 12% to 15% over the past three months. However, valuations have fallen to near historic troughs and imply a significant slowdown in future earnings growth. Historically, when valuations reached similar levels, the relevant stocks gained an average of more than 50% over the following 12 months.

Crowding and financing data tracked by the bank show that net "hot money" positions have retreated to levels seen at the beginning of the year, while the short-selling ratio in Hong Kong stocks is also near historic highs, with short-selling of some AI tech hardware stocks increasing recently.

On the broader market, the MSCI China 12-month forward price-to-earnings ratio has reached 9.5 times, which is 1.2 standard deviations below the historical average. However, Chinese equities' relative earnings growth and momentum remain weaker compared to other markets. RMB appreciation will continue to pressure exporters, and higher input costs may also weigh on domestic consumption.

As a result, the bank favors a barbell strategy, with top picks in AI tech hardware being SMIC (00981), Naura Technology Group Co.,Ltd. (002371.SZ), and Cxmt Corporation (688825.SH), alongside a top pick in bank stocks.