Uncertainties about China's economic recovery over the medium and long term are raising caution among investors about the stock market's performance in the second half of this year, UBS Securities AG chief strategist Chen Li said on Thursday.

"The mainstream believes that in the third quarter, we'll see short-term economic stabilization. However, as long as the three long-term economic warning signs persist - a high debt ratio, excess capacity and a property bubble - the market will likely shrug off any short-term economic stabilization," said Chen.

Since 2012, Chen said, the A-share market has appeared to be increasingly insensitive to any signs of a short-term economic rebound.

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"On the whole, we believe the downside risks outweigh the upside risks in the second half," he said.

Chen cited several negative factors: Continuously worsening property sales and investment growth, a strong corporate need for refinancing and the temporary cessation of renminbi appreciation, or even the start of depreciation, which has expedited capital outflows.

But those factors have been largely priced in by the market, Chen said, adding that unexpected developments could have a major impact.

"For example, there are initial signs of inflation with a rising consumer price index, as the prices of pork, copper and crude oil are moving upward," he said, adding the inflation risk may prevent more monetary easing in the coming months.

A possible acceleration in interest rate liberalization is another downside risk for stocks, and it has not been fully priced in by investors at this stage, he said.

However, Chen also pointed out some supporting factors that are ignored or underestimated by investors.

One such positive factor is the Hong Kong-Shanghai "through train" stock trading program that will offer mutual investment access.

"We believe the A-share market has not yet started to react and may have underestimated the positive impact of this program," Chen said.

The annual quota of 300 billion yuan ($48.6 billion) to the Shanghai stock market may introduce a "significant volume of capital" into the A-share market and effectively lift the value of stocks.