The Swiss firm set out its investment views and tactical asset allocations in a report for June. Valuations for some markets, such as Chinese equities, appear to be discounting a great deal of the headwinds now blowing, it said.

UBS says it likes Indonesian, Thai and Chinese equities for a variety of reasons, as it set out Asia investment views and argued that it preferred value to growth stocks.

One of the world’s largest wealth management houses said it expected market volatility to “remain high in the near term until the market finds more conviction on inflation dynamics, making directional bets very risky."

Explaining its country choices, UBS said: “Indonesia is a net commodity exporter, with improving current account. And more importantly, its 1Q22 corporate earnings were among the strongest in Asian markets. Thailand, on the macro side, is exposed to higher inflation risk but its equity market has a high allocation to energy and material companies, making it an inflation play in Asia.

“China is facing significant economic growth headwinds, but the market’s current valuation reflected most of them,” it continued. 

The bank argued that the MSCI China index is already below the March 2020 Covid-19 low, but MSCI India, MSCI Taiwan, and MSCI Korea are still 80 to 100 per cent above their March 2020 lows, giving Chinese equities more opportunity rise in relative terms. “If China’s economic growth continues to disappoint, we would expect similar or more downside in Asian peers, which are still sitting on large gains from 2020 lows. For instance, since the Shanghai lockdowns started, MSCI China has outperformed MSCI Asia ex-Japan. And if more supportive measures are rolled out to support economic growth, we think China has more room to rebound versus its regional peers,” UBS said. 

Turning to other Asian jurisdictions, UBS said it thinks that the “upside for [South] Korean and Malaysian equities is limited. Korea is sensitive to both US and China growth, and the earnings momentum of Malaysian companies trails that of their Asian peers”.

Asia’s largest economy, China, is still labouring under its severe anti-pandemic policy. 

“There is no quick exit from Beijing’s zero-Covid policy. Economic pressure – and share price volatility – resulting from mobility curbs may therefore persist. We have cut our forecast for China’s GDP growth this year as a result,” Mark Haefele, chief investment officer, global wealth management, UBS, said in a note, which was co-authored with Min Lan Tan, head chief investment officer, Asia-Pacific, GWM. 

The firm has cut its earnings forecasts in the region. “Coupled with our latest foreign exchange downgrades for key Asian currencies; these adjustments bring our Asia earnings growth estimate to 4.9 per cent in 2022,” it said. 

Valuation
UBS said Asia ex-Japan equities price-to-book valuation has fallen to around 1.3 times, close to the levels seen near the eruption of the pandemic crisis. The region’s forward price-to-earnings valuation has declined to 12x, implying a discount of about 15 per cent to the 15-year average. 

The bank noted that beneficiaries of reflationary policies, such as industrials, financials, and materials are the cheapest sectors relative to their own historical means. The IT sector is trading at a mid-teens discount versus its average, driven mostly by the semiconductor industry which more than doubled its earnings from 2019 to 2021.

However, not all sectors are trading below their historical averages, UBS continued. Communication services, healthcare, and consumer discretionary forward price/earnings ratios are still “relatively elevated,” the firm said, not least because of a rising share of internet, electric vehicle and biotech names that are yet to turn a profit.

Japan valuations
UBS struck a cautious, if mildly optimistic, stance on Japanese equities. 

“Stock valuations (P/E ratios) have dropped this year, while dividend yields have risen to 2.3 per cent on average. The Nikkei 225’s P/E ratio was near a 10-year high in March 2021; it’s now near a 10-year low. We think downside from here will be limited by the low P/E ratio and solid earnings. Given the low valuations, solid earnings, and high dividend yields, we expect share prices to rebound for select sectors,” it said. 

Bonds
Turning to fixed income, UBS said it preferred Asian investment-grade names offering a 4 per cent yield, and with durations of no more than five years. It is “very selective” in high-yield debt, preferring specific issuers in areas such as commodities, benefiting from the strong commodity price picture. 

Currencies
The bank said Asian currencies’ have fallen by 4.6 per cent since January against a backdrop of heightened global growth uncertainties, ongoing mobility restrictions in China, and the threat of further sanctions on Russian oil and gas. UBS said that Asian currencies could, however, benefit from the potential peak of the US dollar in the second half of 2022. “On an individual basis, we see further near-term weakness in the CNY (Chinese yuan), the INR (Indonesian rupiah), and the PHP (Philippines peso). Commodity-linked currencies should reverse recent sharp losses once the global growth outlook brightens, we like the AUD (Australian dollar), NZD (New Zealand dollar), and MYR (Malaysian ringgit),” it added.