UBS Report: Investing in Asia Pacific

Strong start, can it continue?

A monthly guide to investing in Asia Pacific financial markets February 21 Edition
UBS Global Wealth Management Chief Investment Office.

Key Messages

• We expect rapid money growth to translate into a fresh lending upswing, supporting banks, property and consumer discretionary sectors.
• Robust earnings growth should support Asia ex-Japan equities this year.
• Pledges to reduce emissions by many regional governments should drive green industries for years to come.

ASEAN's recovery delayed not derailed

The domestic recoveries in Asia, particularly in ASEAN, have been delayed by COVID-19 surges and extended restrictions. After the Lunar New Year, vaccinations (led by Singapore, China, North Asia) and falling new virus cases (already happening in North Asia) should boost confidence and trigger a vigorous consumption recovery. We expect strong recoveries in HK, Singapore, Korea, Indonesia and Malaysia in 1H and Thailand and the Philippines in 2H.

China remains well ahead in its post-COVID rebound. Investment and consumption should drive the economy’s recovery into 2H21. Concerns of overtightening—after Beijing tightened property borrowing and allowed market rates to rise—should be allayed by recent liquidity injections aimed at reducing elevated interbank rates, guidance that there would be no sharp policy turns ahead, and better-than-expected credit data.

Regional reflation is underway

Asia's reflation recovery is underway, with exports rising 11% y/y and solid gains in raw materials prices. Bottlenecks in services should push up prices and lift wages into 2022. Rising inflation expectations and bond yields can be positive or negative depending on the starting level, the direction of travel, the speed of adjustment, and the reasons inflation is picking up. At this early return-to-trend stage, a modest steepening of the US yield curve shouldn't derail Asia’s recovery.

North Asia's exports growth should peak at around 20% in 2Q21 as EU and US consumers emerge from extended lockdowns. The focus should then swing from global cyclicality to domestic stories. Stronger profits and low interest rates are lighting an investment recovery in mainland China, Taiwan and Korea focused on greentech, artificial intelligence and 5G. North Asia, mainland China and Singapore account for the bulk of tech investment so far, but this upswing should broaden to the rest of the region later in the year.

We expect rapid money growth to translate into a fresh lending upswing, supporting banks, property and consumer discretionary sectors. Hong Kong and Singapore (see our Twin City Reflation theme), as finance and property hubs, should benefit from the recoveries in mainland China and ASEAN.

What to expect from a Biden presidency

US-China tensions won’t end with the Biden administration. The Biden administration has signaled it will push allies and partners to exert pressure on China “in lockstep,” with a focus on human rights and security issues. Domestic issues will likely be prioritized by the White House over foreign policy, however.

China’s recent public speeches have warned the US against “Cold War thinking” and interference in “internal affairs,” the latter of which may draw more attention from the Biden administration. But Beijing has been careful to calibrate its responses and retaliations to the Trump administration’s escalations, in our view. So we expect China to observe and understand the Biden administration’s motives before responding.

US talk of a “multi-layered” relationship suggests a desire to cooperate on climate and other consensus issues, which could limit extreme moves that undermine relations or slow either country’s post-pandemic economic recovery.

Upgrades to regional earnings

Asia ex-Japan equities have outperformed global stocks by 5ppts this year and are 90% higher since their March 2020 low. The region’s valuation has consequently risen to 1.9x price-to-book ratio, above the long-term average of 1.6x. That said, its relative valuation versus global equities is still attractive—the region’s trading at a 28% discount, a bigger discount than the long-term average (23%).

Robust earnings growth should support Asia ex-Japan equities this year: we expect the region to post 28% net income growth (without the low base effect many global peers will enjoy), driven by double-digit revenue growth and strong operating margin improvements. Coupled with solid free-cash-flow generation and attractive relative valuations, we think the broad index will rise another 10% until the end of the year.