It’s been another rough month for the region’s financial markets. China, the largest and most important equity market in Asia, continues to slide, with the MSCI China index falling 14% last month and 4% in August so far, the UBS GWM chief investment office wrote in a report this week.
Rising coronavirus cases, delayed reopening plans, and China’s regulatory headwinds are sapping risk appetite, it said.
But UBS GWM remains positive on Asia ex-Japan equities: as inoculations speed up in the region, some countries appear to be bending their Covid-19 curves. While pressure will likely persist in the near term, it is hopeful for a more buoyant end to 2021 and start to 2022. Such conditions should help corporate earnings to grow and equity markets to move past the uncertainty.
“We remain upbeat on Asia ex-Japan equities overall, with a preference for India given its vibrant recovery and for Malaysia in view of its surging vaccination rate and cheap valuation,” said Adrian Zuercher, head global asset allocation at UBS GWM.
Zuercher expects Asia ex-Japan’s earnings to grow by 28.5% this year and by double digits again in 2022, powering mid- to high-teen returns for the benchmark MSCI Asia ex-Japan index until June 2022. More granularly, UBS GWM’s basket of “reopening and reflation beneficiaries” offers an average earning-per-share growth rate of 50% for the next 12 months.
UBS GWM sees tactical upside in select names among the financials, materials, and industrials sectors amid resilient earnings recovery and still relatively attractive valuations.
The wealth manager also likes leaders in the “quality cyclical” sectors. It remains constructive on reasonably priced platform leaders in the internet space, along with select cyclical tech industries. Structural themes such as subscription champions in Asia, China greentech, 5G supply chain, China’s digital economy, and Asean are also “promising”.
Zuercher encourages investors to include ESG factors when building their portfolio.
The path forward requires continued development of key technologies, including renewable energy and electrification of everything from vehicles to machinery, to achieve emissions reduction targets, he said.
Beyond specific green themes, Zuercher recommends positioning in ESG leaders for better preparedness in the years ahead. A combination of both strategies could fit within a 100% sustainable investing portfolio that aims to optimize risks, returns, and impact considerations over the long term.