The weaker US dollar in the back half of this year is also expected to benefit emerging market equities, which UBS believes could deliver some of the highest asset class returns over the next decade.
The wealth manager recently upgraded Indonesia to a “most preferred” rating on the back of the country’s robust economic backdrop. Indonesia’s equity market is set to record 7 per cent earnings growth this year, following a strong 40 rise in corporate bottom lines from the end of 2019 to the end of last year.
Indian stocks are also a key pick of UBS as the world’s fastest-growing economy continues to defy the global slowdown, driven by strong domestic demand. UBS forecasts the Indian sharemarket to rally 12 to 13 per cent this year, with “upside risk”.
Sorting through the rubble
“Indonesia and India are domestically driven markets that aren’t reliant on exports, and over the past 18 months, the broader Asia region has seen exports come off quite sharply,” Mr Tay said.
“While we expect a recovery in Asian exports this year, it will be pretty weak, so we think interest from investors in the first half of this year will remain with the domestically oriented markets, so Indonesia and India will do well from that.”
UBS is also bullish on beaten-down Chinese shares given its view that Beijing will be forced to provide further policy support, sparking a gradual economic recovery and improved corporate earnings.
The Asian giant offers investors cheap valuations, with the MSCI China Index trading at around 8.5 times 12-month forward earnings, and low global fund allocations, creating an attractive buying opportunity.
UBS joins a growing number of firms investing in Chinese stocks, with Lazard’s top market strategist telling the Financial Review this week that its Emerging Markets equity strategy had significantly increased its exposure to the Chinese sharemarket.
Even so, UBS cautions that the Chinese market does present uniquely complicated risks, including the possibility that policy support comes too little and too late. For that reason, Mr Tay is keeping a close eye on the National People’s Congress next month.
“We expect some policy announcements to come out during that period,” he said. “But if those announcements underwhelm, the underperformance of the Chinese market will likely continue for some time.”
While UBS’s base case for this year includes a moderate step up from the tentative support Beijing unveiled in 2023, it is not ruling out a “bazooka package” that includes unconventional demand-stimulative policies, particularly if concerns about growth become entrenched and spur a ‘whatever it takes’ mindset.
Such an outcome would provide support to iron ore prices, which this week plunged to a three-month low of $US120 a tonne, and help drive further gains for the Australian sharemarket.
“The key factor driving sentiment for China, and therefore the ASX is China’s property market, where sentiment is very, very weak,” Mr Tay said.
“If this big stimulus does come through in March, which I don’t think is likely, the ASX will probably be given a significant lift.”
