UBS Investment Bank has taken the contrarian approach of overweighting China and underweighting India, which it justifies on the basis of strong fundamentals in the case of the former and stretched valuations in the case of the latter.
India, in particular, has been a consensus pick among foreign firms for their 2025 outlooks, having outpaced even the S&P 500 index in US dollar terms during the past 12 months until the most recent correction in late September.
However, some detractors have pointed to stretched valuations, particularly in the small and mid-cap space as reasons to exercise caution, not to mention that the country’s economy appears to be cooling. These were points echoed by UBS Investment Bank Asia Pacific equity strategist Karen Hizon.
“We are underweight and it’s because valuations are at extraordinary levels while company fundamentals remain ordinary. You can see the fundamentals of Indian companies are actually quite in line with that of the region, but when we look at valuations, they’re at all-time highs.”
Hizon also pointed to the fact the percentage of household assets in India held as equities had increased from low- to mid-single digits when the Covid-19 crisis hit to 23% currently so there was a risk that it would remain sensitive to deposit rates for an alternative.
With regards to China, which has been out of favour among investors after years of disappointing returns, Hizon argued that there was a difference between the overall economy and the stock market, where the fundamentals remain strong.
“Chinese companies have been in line if not better than the region despite the weak consumption and the problems in the property sector. And we think that it’s really because the structure of economy is quite distinct from the stock market. About 55% of the index are internet and consumer-related stocks, while real estate is sub-3%.”
She also pointed to the fact that returns on equity were due to improve, in part due to share buybacks and dividends, while valuations were compelling at a 40% discount to the region versus the 13% premium it had enjoyed over the past decade.
Overall, Hizon noted that the incoming Trump administration would have a negative net impact on Asian equities, although this would vary from market to market.
She argued that Korea and Taiwan faced the biggest risk, whereas China was more neutral, although she noted that Trump had floated plans to introduce 60% tariffs there so its impact could be more significant.
She said that overall she favoured markets where domestic momentum was improving , most notably southeast Asia.
Hizon also noted that technology remained vulnerable due to any slowdown in demand from AI as overall demand from traditional pools such as servers and PCs was muted.
