UBS Global Wealth Management (UBS GWM) advises its client to position for the reopening of economies and reflation through value and cyclical stocks in Asia, with an industry focus on capital goods, construction materials, consumer services, transportation, banks, and metals & mining.
“The re-opening of economies should most benefit those more reliant on travel (Singapore, Thailand) and those driven by domestic services demand (China, India, Indonesia),” said the latest statement from the UBS GWM chief investment office.
Specifically, Singapore, China and India remain the firm’s “most preferred” markets, and it has upgraded Malaysia to “neutral” because of “improving fundamentals”.
UBS GWM notes that Singapore is the second best-performing market in Asia year-to-date thanks to its value characteristics; mainland China is still facing anti-trust headwinds, but the fine on Alibaba suggests a manageable outcome; and while India is suffering from record new Covid-19 cases, “the recent [market] correction offers a good entry point”.
In contrast, Hong Kong and the Philippines are the firm’s least preferred markets. Among fixed income categories, it is avoiding Asia investment grade credits due to their limited upside potential as US Treasury yields rise, but likes Asia high yield on expectations of improving credit metrics, as well as onshore China Government Bonds because of their diversification qualities.
UBS GWM’s positive outlook for risk assets is largely predicated on confidence in the efficacy of the coronavirus vaccine to allow economies worldwide to take off.
The Switzerland-headquartered firm recognises that risk sentiment in Asia has sagged as a result of Covid-19 resurgences in some countries, a trailing pace of vaccination compared with other regions, and heightened regulatory risk in China.
As a result, the MSCI Asia-ex Japan index has dropped 8 percentage points (ppt) and underperformed the S&P 500 by 13ppt since mid-February.
Restarting economies
“Yet the fundamental narrative remains the same. Vaccines are allowing economies worldwide to restart, and a vibrant economic rebound is happening globally,” said the chief investment office.
Moreover, it points out that the risks of higher US interest rates and stricter Chinese regulations appear mostly priced into asset prices, monetary policy remains highly accommodative, and the US government is unleashing waves of fiscal stimulus.
Economic activity revived quickly in the Asia Pacific through the first quarter of the year, particularly in the IT-strong economies of Mainland China, Taiwan, Korea and Singapore.
“We’re now approaching the peak in economic momentum, with Asia ex-Japan real GDP set to exceed 20% year-on-year in the second quarter,” said the chief investment office.
“The growth impact from new Covid-19 clusters is manageable, in our view, as the region is speeding up its vaccination rollout,” it said.
UBS GWM expects Apac inflation to bounce in the second quarter, led by services, but even with the prospective lift in prices, it doesn’t anticipate policy rate hikes this year in Asia.
