UBS: For every 10% increase in oil prices, the A-share index's earnings per share will increase by 1% to 2%

UBS’s China Equity Strategy report released on March 18 points out, if oil prices continue to rise, how should investors position themselves? The report presents a set of data that is quite counterintuitive. If Brent crude remains at $100 per barrel, it could actually provide about a 1% upside potential for overall A-share profits.

First, UBS believes that rising oil prices do not have a solely negative impact on the overall profitability of A-shares; instead, there are structural profit opportunities. According to UBS analysts’ survey, if Brent crude stays at a high level of $100 per barrel, the overall profits of A-shares could see approximately a 1% increase. This positive effect is mainly driven by better-than-expected earnings in the energy and chemical industries. UBS estimates that for every $10 increase in oil prices, the earnings per share of the A-share index could rise by 1% to 2%. UBS points out that the energy sector, as a direct beneficiary of rising oil prices, will see its revenue and profits grow accordingly. Meanwhile, the chemical industry can pass some of the raw material cost increases downstream, and even achieve excess profits through pricing power.