Investing in Asia Pacific - Navigating turbulence - UBS
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A monthly guide to investing in Asia Pacific financial markets
Investing in Asia Pacific
2019 outlook
Chief Investment Office GWM
Investment Research
Navigating turbulence
ab
Contents
Editorial
Navigating
turbulence
05
2019
Key investment ideas
12 China-US relations: Managing a new era of strategic rivalry
15 Trade tensions: The implications for businesses
18 Regional politics: The case for diversification
21 Technology: The tug of war – innovation vs. regulation
24 Asia real estate: Headwinds but no recessions
26 Search for yield: Stay safe
28 Japan: Be selective
Tactical views
32 Macro
34 Asset allocation
35 Equities
36 Bonds
37 Currencies
This report has been prepared by UBS AG and UBS Switzerland AG. Please see important disclaimers and
disclosures at the end of the document.
Please note there may be changes to our house view and tactical asset allocation strategies prior to the next
edition of Investing in Asia Pacific. For all updated views, please refer to the most recent UBS House View:
Investment Strategy Guide.
Investing in Asia Pacific 4 UBS CIO GWM December 2018
Editorial
Investing in Asia Pacific
Navigating turbulence
2018 has been a rougher year for Asia than we had foreseen – the region’s This year turned out
equity benchmark, the MSCI Asia ex-Japan (AxJ) Index, has fallen by more to be rougher for
than 14% in USD terms (as of 30 November 2018). Escalating China-US Asia than expected
trade tensions, deleveraging in China, and the desynchronization of global
growth are largely to blame. And as later-cycle dynamics take hold, we think
the risk-reward trade-off could become even more challenging in 2019.
As we detail in the pages that follow, we expect continued volatility as
economic growth slows and as political risks challenge regional policy-
makers and businesses alike. Still, we see opportunities and believe the
environment remains navigable through selectivity, diversification, and a
clear long-term investment plan.
Asia’s 2019 outlook is clouded
Selectivity, diversifi-
Economic growth is slowing in Asia – we forecast 5.8% GDP growth in
cation and having a
2019 versus 6.2% in 2018 – but we don’t see the conditions commonly
clear plan are key
associated with an impending recession. Nevertheless, strategic concerns
for 2019
like a potential reconfiguration of global supply chains are clouding the
region’s investment outlook.
The silver lining is that these risks and relatively benign inflation should
keep Asian central banks mostly on hold. Lower oil prices and a weaker
US dollar should help Asian assets in the second half of the year, but both
could head higher in the short term.
China-US relations, the elephant in the room, will shape Asia’s fortunes in
2019 and beyond. A pivotal meeting between the US and Chinese
presidents at the G20 Summit suggested relations may be thawing, with China-US relations
the US agreeing to postpone a planned escalation of tariffs till 1 March. will continue to
This pause implies a willingness from both sides to reach a deal. shape Asia’s
But finding a mutually agreeable solution will not be easy, and conse- fortunes
quently a breakdown of these talks remains a key risk for markets.
In the long run, the recent detente aside, we believe China-US relations
have entered a new era of strategic rivalry on which the two economies
could increasingly decouple. For individual firms, this splintering of supply
chains could bring both positive and negative consequences, so the over-
all impact is unknown at this stage.
UBS CIO GWM December 2018 5
Investing in Asia Pacific
UBS economic forecasts
Global * Asia **
GDP Inflation GDP Inflation
3.9% 3.6% 3.2% 5.8% 2.8%
3.8% 3.1% 6.2% 6.2% 2.7%
2.7% 2.2%
2017 2018 2019 2017 2018 2019 2017 2018 2019 2017 2018 2019
Note: 2018/2019 are forecasts. * Global: excluding Venezuela. ** Asia: excluding Japan
Source: UBS, as of 26 November 2018
Valuations look unaligned with fundamentals
Asia’s beaten-down valuations offer an opportunity, in our view, as they Look out for
reflect an earnings expansion well below our 6.6% forecast – the 1.4x Chinese policy
price-to-book (P/B) ratio currently reflects negligible earnings growth. An support and higher
expected step-up in Chinese policy support is helpful and solid corporate dividend payouts
fundamentals should underpin dividends, which have historically helped
to offset pick-ups in volatility.
In the weeks and months to come, a number of key events could alter
our tactical positioning. Two standouts are the China-US relationship and
communication from the Federal Reserve. Crucial elections in India,
Indonesia, and Thailand also bear watching.
We remain positive on equities as a whole, but this view is contingent on We're positive on
China-US trade tensions not escalating further. In our regional strategy, regional equities
within Asia we’re overweight China, South Korea, Singapore, and heading into the
Indonesia and underweight Hong Kong, Taiwan, Malaysia, and new year
the Philippines. We remain overweight JACI high yield (HY) versus
JACI investment grade (IG) bonds for carry, and we’re long SGDTWD.
(See page 39 for details.)
6 UBS CIO GWM December 2018
Investing in Asia Pacific
Ideas for 2019 and beyond
Equities: Oversold financials and technology, secure dividend yields, and
We like oversold
beneficiaries of China’s stimulus measures. Select financials and tech provide
financials and tech,
a good mix of growth and value exposure, while high-yielding stocks with
firms with secure
strong balance sheets and a history of sustainable payouts, such as REITs in
yields and stimulus
Singapore and Hong Kong, should be resilient. We also prefer companies
beneficiaries
linked to Chinese infrastructure and materials sectors, and firms with greater
domestic market exposures like insurers and some regional banks.
Asia credit: HY still worth the risk. We expect Asia credit to generate about
3–4% total return in 2019. Yields are attractive – 5% for IG and 9% for HY
– though we are highly selective on individual names. We prefer short-dated
HY Chinese property developers, specific BBB rated issuers, bank Tier 2 debt,
perpetuals with high step-ups, and select Chinese state-owned enterprises. Asia HY remains
worth the risk
Asia FX: More pain before gain. We expect the region’s exchange rates
versus the US dollar to end 2019 largely where they stand now. But it
won’t be a straight line: we expect further weakness in the short run and
then strength after the Fed indicates an end to the hiking cycle. The
USDCNY pairing will follow its own path, however, gradually rising to 7.3
by end-2019 though the trade truce could keep it from breaking above
7.0 over the next couple of months.
Beyond 2019: Expect shifts in supply chains, secular growth in disruptive
USDCNY to
innovations, and a greater focus by corporations on environmental,
gradually rise to 7.3
social, and governance (ESG) issues. The disruption of supply chains is set
by end-2019
to benefit Vietnam and to a lesser degree Thailand and Malaysia. Softer
consumer demand and regulations remain near-term headwinds for tech-
nology, but structural prospects in segments like gaming and biotech
offer value for longer-term investors. Private markets are a good way to
gain exposure to growth areas like artificial intelligence and health tech.
Investors can also consider ESG leaders in Japan.
Mark Haefele Min Lan Tan
Chief Investment Officer Head Chief Investment Office APAC
Global Wealth Management Global Wealth Management
UBS CIO GWM December 2018 7
Investing in Asia Pacific
Key investment ideas
China-US relations
Managing a new era of
strategic rivalry
China-US relations are likely to get more complex and
challenging, but a full-on Cold War is unlikely. Rather,
we could see a long cycle of fight and talk over a broad
range of issues and a gradual decoupling of the two
economies. Beijing is hunkering down to stabilize the
domestic economy, as substantial concessions are out of
the question considering Japan’s trade war experience. see page 12
Trade tensions
The implications for
businesses
A readjustment of Asian supply chains is expected
to continue, with Vietnam, Thailand and Malaysia
benefiting from increased FDI and rerouted Chinese
M&A. While hard to estimate, corporate margins
will likely fall and capex spending will eventually
rise as supply chains reconfigure. Businesses with
exposure to automation and Beijing’s ramp-up in Regional politics
R&D should benefit.
see page 15
The case for
diversification
China-US relations will likely dictate geopo-
litical headlines and risk sentiment in the
region over the coming years. Investors also
need to keep watch on regional elections in
India, Indonesia, Thailand and potentially Sin-
gapore. Dramatic policy change (e.g. more
reform) seems unlikely; if anything, a boost to
fiscal spending is a potential upside risk.
see page 18
8 UBS CIO GWM December 2018
Investing in Asia Pacific
Technology
The tug of war –
innovation vs. regulation
The regulatory backlash in 2018 is unlikely to derail the
long-term growth prospects of Asia’s innovative indus-
tries. Regulations, in our view, are intended to prevent
excesses and promote sustainable growth, and not to
deter online business models. Near-term risks remain,
but for longer-term investors, we see attractive oppor-
tunities in public markets (biotech, gaming) and private
markets (artificial intelligence, healthtech). see page 21
Asia real estate
Headwinds but no recessions
For Asian real estate, policy headwinds are likely to
persist, but we don’t anticipate major price correc-
tions in the next 12 months. In Singapore, prices
should remain stable within a +/–2% range. In
Hong Kong, prices could fall 10–15% after rising
130% over the past five years. In China, prices in
higher-tier cities should stay flat, while those in Search for yield
lower-tier cities could fall 5–10%.
see page 24
Stay safe
Investors should focus on safe-yield strategies
in Asian bonds and stocks in 2019. We focus
on instruments with low correlations to the
market overall, and companies that historically
exhibit a stable yield. We think this should help
insulate investors against short-term volatility.
see page 26
Japan
Be selective
We believe 2019 will mark the beginning of the
end of Abenomics. We remain neutral on Japan’s
equity market in our global tactical asset alloca-
tion. Within Japan, we like select blue chips whose valuations are overly downtrodden versus fundamentals
and companies involved in digital payments, and focus on longer-term themes like ESG leaders.
see page 28
UBS CIO GWM December 2018 9
Investing in Asia Pacific
Asset class views
Asset allocation Macro
• Strategically diversified global portfolios offer
the first line of defense amid heightened market
volatility.
• Valuations of risk assets in Asia are attractive,
but to generate returns we expect to be more
flexible in moving between equities and bonds
as well as in our relative value ideas in 2019.
• We expect Asian 2019 GDP growth to fall 0.4ppt
to 5.8%.
• China will likely ease policy further in 1H19 in
response to tariff-driven uncertainty.
• Monetary tightening in the rest of Asia should
pause, while higher oil prices pose a moderate
risk to a benign inflation outlook.
Equity
• Select financials and IT names
• Beneficiaries of Chinese stimulus
• Vietnam
• High-yielding dividend stocks with sustainable
payouts
Bonds Currencies
• Long SGD, short TWD
• Long USD, short KRW
• Long USD, short North Asian basket
(50% CNY, 25% TWD, 25% KRW)
• Yield enhancement for local currency deposits
• Select BBB rated bonds
• Bank Tier 2 debt
• Perpetuals with high step-ups
• Shorter-dated HY China property
• Select SOE names in Asia
10 UBS CIO GWM December 2018Investing in Asia Pacific
What we’re watching
2019
Legend:
Jan Japan Late Jan, BoJ meeting
Budget
Feb India Central govt FY20 budget
Elections
Thailand Between Feb-May, general elections
Other events
Mar China National People‘s Congress
India Between Mar-Apr, parliamentary elections
Apr Japan 1 Apr, nationwide local elections
Indonesia 17 Apr, presidential and parliamentary elections
Japan Late Apr, BoJ meeting
China China Politburo meeting
ASEAN Summit
May Philippines 13 May, congressional, regional and provincial elections
Thailand Government budget 2019–20
June Japan 28–29 June, G20 meeting in Osaka, Japan
July Japan 1 July, Upper House election
Late Jul, BoJ meeting
China China Politburo meeting
Aug Indonesia 16 Aug, government budget 2020
Philippines State of the Nation Address and Budget 2020
Singapore National day rally
Korea Between Aug-Sep, government budget 2020
Sep Vietnam Between Sep-Nov, government budget 2020
Oct Indonesia 26 Oct, New Indonesia cabinet announced
Japan Late Oct, BoJ meeting
China China Politburo meeting
Malaysia Federal budget
Nov Japan Fall, constitutional referendum
ASEAN Summit
APEC Summit
Dec China Mid-December, Central Economic Conference
China Politburo meeting
2020 (Select events)
Jan Taiwan General election
Apr Korea Legislative election
UBS CIO GWM December 2018 11Investing in Asia Pacific
Idea 1
China-US relations: Managing
a new era of strategic rivalry
Yifan Hu, Regional Chief Investment Officer & Chief China Economist
Daiju Aoki, Regional Chief Investment Officer & Chief Japan Economist
Teck Leng Tan, Analyst
Hyde Chen, Analyst
Kathy Li, Analyst
China-US relations are in uncharted waters economies and supply chains splintering along
and are likely to get more complex and chal- regional lines seems the most likely outcome
lenging in the years ahead. The base scenario in the long run. A full-on cold war in trade or
we foresaw was a long cycle of fight and talk security still remains only a tail risk, in our
over a broad range of economic and security view, given the economic ties and cultural
issues. The recent G20 meeting between inter-dependencies of the two countries.
president’s Xi and Trump and the pause in tar-
iff escalation is a point in case. Still, a compre- Hunkering down to ensure domestic
hensive rollback of tariffs looks elusive at this stability
stage. The US currently maintains tariffs on a By most accounts, Beijing has miscalculated
total USD 250bn worth of Chinese imports, the severity of the US trade conflict as well as
has ratcheted up the pressure by tightening the effect deleveraging would have on the
foreign investment in 27 critical tech sectors private sector and local government infra-
(including semiconductors, aircraft and structure spending. China has since reversed
biotech) and has introduced “poison pill” course and shifted to policy easing in late July,
clauses in the new USMCA trade deal, and further measures – relating to state-
implicitly targeting China. owned enterprise reforms, market access and
tax cuts – are likely to be announced at the
China has responded with retaliatory tariffs of upcoming Central Economic Work Confer-
5–25% on USD 110bn worth of US goods, ence in mid-Dec 2018 and political gatherings
nearly 70% of total US imports. Despite the celebrating the 40th anniversary of China’s
recent truce, a gradual decoupling of the two reforms and opening-up program.
12 UBS CIO GWM December 2018Investing in Asia Pacific
The road ahead for China
Beijing to reach into policy toolbox to ensure stability. Faced with limited options, we
expect the Chinese government to hunker down and stabilize the domestic economy, keeping
GDP growth above 6% in 2019, via the following policy mix:
Monetary policy The reserve require- Credit policy Modest rebound in
ment ratio has been cut 250bps in % broad credit growth (2018/19:
2018 and another 100–200bps of cuts 10.5%/11%) expected due to:
is likely in the next 6–12 months. • AMP rules relaxation to cushion
drop in shadow lending;
Fiscal policy Deficit to widen from
• Direct policy support for SMEs:
–2.9% in 2018e, to –3.3% in 2019e
National fund set up to guarantee
on:
SME loans, extended MLF collateral
• Infrastructure spending, likely to
coverage for banks, and lower
grow >10% in 2019, from 2% in
MPA parameters for banks.
2018.
• Tax cuts worth c. CNY 1trn (1% of
CNY policy Capital controls to
GDP) have been announced, with
remain highly restrictive. China to
further cuts to property, inheritance and
combat speculative selling and avoid
gift taxes reportedly in the pipeline. But
“weaponizing” the CNY, but will
the multiplier effect will likely be limited
likely allow gradual fall as
given the weak economic outlook.
fundamentals weaken.
Housing policy Select cities have eased • USDCNY forecasts: 7.1 in 3M, 7.2
mortgage rates for first-time buyers, but in 6M and 7.3 in 12M (as of 27
broad-based easing is unlikely. November 2018).
Policies unlikely to be pursued unless China is pressed into a corner:
• Massive 15% depreciation of the CNY in a 12-month period
• Selling of US Treasuries
• Overtly punishing US corporations operating in China
Trade conflict a potential long-term positive. China’s sizable market is too big for investors
to ignore. A positive outcome of US pressures is that Beijing may accelerate the opening up of
its domestic market to foreign investment. So far, commitments include:
Strategic partnerships with key allies, Wider market access for foreign
especially Japan. Japanese PM Abe’s investors in manufacturing sectors,
latest visit to China in late October – the including autos, and allowing
first in his 7-year tenure – marked a mile- majority foreign ownership of
stone in resetting the tumultuous rela- Chinese financial firms.
tionship between the two. They signed a
broad range of deals, ranging from Further lowering import tariffs on
infrastructure, energy and car projects to autos and certain consumer goods.
a USD 30bn currency swap pact.
UBS CIO GWM December 2018 13Investing in Asia Pacific
Lessons learned from the Japan-US trade – which ultimately led to the infamous lost
war decades. From Beijing’s perspective, sharp
The Japan-US trade war of the 1980s–1990s currency appreciation, aggressive easing of
bears key lessons for Beijing. Then, as now, a monetary and fiscal policies, and the excessive
rising Japan-US trade surplus led to a cre- tolerance of bad debts are policy choices to
scendo of complaints from the US about avoid.
unfair industrial policy practices and the loss of
manufacturing jobs. As tariffs mounted, Japan Contest to persist on all fronts
yielded by imposing voluntary restraints on China-US relations have entered a new era of
exports and shifting its auto production base strategic rivalry, one that extends well beyond
to the US. It also sought to aggressively boost trade and investment to differences over the
imports through an ultra-loose monetary pol- rules of the game, values and governance
icy and fiscal pump priming. And as Japan’s models. It’s also a contest over geopolitical
trade surplus continued to grow despite the influence and technological supremacy. As the
measures, the US initiated a coordinated inter- two countries move away from nearly three
vention in dollar sales via the Plaza Accord of decades of greater economic engagement,
1985, which resulted in USDJPY falling from relations will likely get more fractious –
240 to 120 in a two-year period. Looking although the possibility of a global trade war
back, many Japanese economists now believe remains low, in our view. We think a cycle of
that the concessions made by Japan spurred fight and talk will persist, which ultimately
the hollowing out of its domestic industrial could reshape the current global geopolitical
base and the bubble economy of the late 80s order.
Japan’s auto sectors sharply shied China’s GDP growth is on track
production base to US under for moderation
yen appreciation in 1980s China’s quarterly GDP growth and share of its
Japanese auto imports from Japan to US and decomposition, in %
assembled in US, and USDJPY 8.5 120
4.5 360
100
4.0 320 8.0
80
3.5 280
7.5 60
3.0 240
2.5 200 40
7.0
2.0 160
20
1.5 120 6.5
1.0 80 0
0.5 40 6.0 –20
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q18
0.0 0
1975 1980 1985 1990 1995 2000 2005 2010 2015
Vehicles imported from Japan to US (millions, LHS) Quarterly real GDP (% y/y, LHS)
Japanese vehicles assembled in US (millions, LHS) Consumption (% share to GDP growth, RHS)
USDJPY (RHS) Gross capital formation (% share to GDP growth, RHS)
Net exports (% share to GDP growth, RHS)
Source: Japan Automobile Importers Association, Bloomberg,
UBS, as of November 2018 Source: CEIC, UBS, as of 3Q18
14 UBS CIO GWM December 2018Investing in Asia Pacific
Idea 2
Trade tensions:
The implications for businesses
Thomas Deng, Regional Chief Investment Officer & Chief China Strategist
Philip Wyatt, Economist
Sundeep Gantori, Analyst
Carl Berrisford, Analyst
Hyde Chen, Analyst
Firms caught in the middle of the China-US
trade dispute face two options: stay and pay Tensions between China and US are
the tariffs or move to avoid them. Companies
diverting business to the neighboring
countries
with existing operations in third countries,
Asian neighbors likely to be the recipients of
such as Vietnam, Thailand or Malaysia, may production shis
opt to accelerate their pivot to these loca-
tions. But those without alternate production Japan, Korea, Taiwan
sites outside China could choose to wait for
more clarity before deciding, especially if they
face elevated fixed costs and other considera-
tions like synergies with Chinese suppliers or
China USA
the need for specific skill requirements that
cannot be easily replicated elsewhere.
Corporations that shift production may also
use this window of opportunity to upgrade Southeast Asia
their facilities, which would prove to be a
Source: UBS, as of November 2018
windfall for capex and equipment spending
globally. So, depending on the location, the
reconfiguration of trade could have long-last-
ing positive and negative knock-on effects.
On a sector level, overall, we think automa-
tion will be a universal winner of this supply-
chain reorganization.
UBS CIO GWM December 2018 15Investing in Asia Pacific
Evaluating the direct and indirect impacts
Direct impacts (on firms with products research and design done in the US but
placed on US or Chinese tariff lists) products made in China – together they
When determining the impact on firms control 80% of the US market.
from tariffs, a number of factors must be
considered such as: the goods in question, • Conversely, a China-based automotive
the tariff rate to be imposed, the availability parts manufacturer we interviewed said it
and competitiveness of substitutes, the sen- was scoping out opportunities to expand
sitivity of demand to a change in price, and manufacturing to Mexico as a way of
for intermediate products, their position in reducing future trade-related risks.
the value chain and their geographic loca-
tion. Hence, determining the overall effect Increased pressure on Chinese exporters’
is a difficult endeavor. margins due to higher costs will be a key
short-term direct impact of the tariffs. We
In the near term, we think companies with estimate the tariffs could cut 25–30bps
greater pricing power are likely to be most from Asian corporate margins in 2019.
defensive and expect them to delay their The longer-term effect will likely be
relocation decisions. In contrast, for cost- increased capex from the need to shift
sensitive firms with limited pricing power, manufacturing.
we believe they will accelerate their reloca-
tion to low-cost countries in Southeast Asia Indirect impacts (from changing global
(ASEAN) such as Vietnam, Thailand or trading patterns)
Bangladesh. Here are some examples of In general, indirect impacts will be seen in
corporate rationale on the subject: macro factors like weaker economic growth,
business confidence or capex. For example,
• A China-based robotics company with Bloomberg Intelligence predicts a 3–4%
sizeable US exposure we spoke with has slowdown in global container demand
been accelerating shipments to the US in growth during the next few quarters due to
recent months - its products are subject rising trade uncertainty. A broad-based
to a 10% US tariff and would face even slowdown in capex is possible in the short
higher tariffs if new talks between China term, and this would have knock-on effects
and the US were to fail. At this stage, it’s to activity and consumption in certain parts
planning to keep its operations in China of Asia – but it would lift firms’ cash flow in
because of the high costs and challenges the short term. All is not bad, however, as
in relocating. The company is closely we see a number of opportunities for select
watching the pricing of its major compet- companies and sectors in the short to
itor, a Boston-headquartered firm with medium term:
16 UBS CIO GWM December 2018Investing in Asia Pacific
• Two logistics firms told us that these Australian beef and South American
tariffs could boost their intra-Asia trade soybean producers benefitting from
further, particularly ASEAN-China trade. increased Chinese demand due to tariffs
on US agricultural products.
• Other examples include Chinese car
retailers increasing their imports of • The defense sector should be a clear ben-
Japanese-made luxury models because of eficiary from any rise in regional geopo-
Chinese tariffs on US imports, and litical tensions.
China likely to double-down on
China’s R&D spending has reached
investment plans
2.1% of GDP in 2015, from 0.9% in 2000
Automation is the clear winner as new facto- R&D spending as a % of GDP
ries regionally move up the value-added lad-
3.5
der, which should be a boon for low-tech
Chinese automation players. Select Chinese 3.0
companies could also benefit from Beijing’s 2.5
ramp up of high-tech, basic and applied 2.0
research in order to move up the global value
1.5
chain and to improve its technological inde-
pendence. Despite these recent challenges, 1.0
we believe China will eventually achieve 0.5
greater self-sufficiency in key industries with
0.0
best-in-class technology. Also, we believe 2000 2003 2006 2009 2012 2015
Chinese firms will likely continue to diversify
China Japan
and invest in growth industries regionally in European Union United States
ASEAN and India.
Source: OECD, UBS, as of November 2018
UBS CIO GWM December 2018 17Investing in Asia Pacific
Idea 3
Regional politics:
The case for diversification
Kelvin Tay, Regional Chief Investment Officer
Delwin Kurnia Limas, Analyst
Carl Berrisford, Analyst
Valerie Chan, Analyst
China’s ascension from abject poverty just 35 remains in line with nominal GDP growth. As
years ago to become the world’s second big- illustrated by the table below, China’s military
gest economy has inspired both admiration spending does not appear excessive. In fact,
and fear, not least because its sociopolitical considering that China just started to mod-
model is so antithetical to that of the prevail- ernize its military in recent years, its spending
ing liberal order. both in terms of the size of its population and
geographical spread is certainly not alarming.
With a population of 1.4 billion and mostly
entrepreneurial people, a stable China will China and the world’s interests lie in creating
anchor much prosperity and progress in both an environment in which it will not be feared
the developing and developed worlds for as a revisionist power. Indeed, as the main
many years to come. Yet China’s ascent as a beneficiary of the current multilateral global
global superpower is also bringing with it new trading system, it will serve China well to reas-
challenges and tensions, both as it flexes its sure the rest of the world that it would actively
growing influence to reshape international refrain from leveraging its economic power in
rules and institutions to better serve its inter- manners that concern its trading partners.
est, and as powers in relative decline, notably
the United States, start to see China as a Busy political season ahead in Asia
potential security threat. Alongside geopolitics, Asia has a crowded
domestic political calendar in 2019, with cru-
Fears of China’s military ambition may be cial elections due in India, Indonesia, Thailand,
overblown with Singapore also a possibility. So a key
The tensions between the US and China will pressing question is whether political develop-
dominate regional politics in the years ahead, ments affect capital markets in Asia.
but a conflict is not inevitable as there
remains little appetite among even US allies to The relationship between politics and financial
overtly take sides against China. At any rate, markets is complex, especially in emerging
we think fears of China’s military ambition Asia where a large share of the population
and expansion plans are likely overblown. In still resides in rural areas. This inter-relation is
2017, China’s military spending increased by also complicated by the fact that in some of
5.6%, the lowest annual rise since 2010 and these countries, diverse factors such as reli-
18 UBS CIO GWM December 2018Investing in Asia Pacific
gion, the military and even the aristocracy a sudden change in the political landscape
may shape the political landscape. In contrast, could trigger a sharp reaction in asset prices
in the more developed Asian markets, socio- that could have a longer-lasting impact.
economic issues such as the Gini coefficient,
the quality of employment and immigration Foreign ownership and its domestic
are often more dominant. implication
The level of foreign ownership of a country’s
The overriding factor is uncertainty. Regardless of assets also matters. Foreign investors may not
how adverse the politics might seem, if uncer- be as familiar with the nuances of local poli-
tainty is reduced, asset prices tend to respond tics and therefore usually have a smaller appe-
favorably all things being equal. Market volatility tite for political risk, often reducing their
increases with uncertainty. The more confused equity exposure at the first signs of unfavora-
the voting public is about who will win the elec- ble political developments. As the majority of
tion, the more the stock market and the cur- these foreign funds are usually USD-denomi-
rency will be affected by the ensuing volatility. nated, the potential equity losses may even be
magnified by local currency weakness. Local
But when the political outcome is clear, markets investors, on the other hand, are sheltered
tend to respond positively to the lower uncer- from foreign exchange exposure and have a
tainty. Take Thailand’s stock market for exam- deeper understanding of local politics, so they
ple. When the Thai military launched a coup are less likely to be trigger-happy.
d’etat in May 2014, the Thai stock market, as
measured by MSCI Thailand, outperformed the In short, knee-jerk asset price reactions to sud-
MSCI Asia ex-Japan Index by 12.5% over the den changes in the political environment are not
next six months, as the military government put uncommon but are usually short-term in nature
an end to months of political gridlock, eco- and not uniformly spread out. Fundamentals are
nomic paralysis and sporadic violence. This con- far more important over the medium to longer
trasted sharply with the underperformance of term, although political uncertainty combined
9.5% in the six months and 22% in the 12 with weaker economic conditions tends to com-
months before the military takeover. mand a larger risk premium. Nonetheless, we
do not expect any major changes to the funda-
In countries where the independence of mentals of India, Indonesia and Thailand due to
government institutions has been undermined, general elections in 2019.
China’s military spending is not excessive
Breakdown of military spending in different countries
US China France United Kingdom
Total spending (USD bn) USD 610 USD 228 USD 57.8 USD 47.2
Percentage of GDP 3.2% 1.8% 2.2% 1.8%
Per capita USD 1,872 USD 164 USD 861 USD 715
Per sq km USD 62 USD 24 USD 90,000 USD 194,000
Source: SIPRI Military Expenditure Database, UBS, as of November 2018
UBS CIO GWM December 2018 19Investing in Asia Pacific
Key things to watch in 2019
2019 will be an eventful year for politics. while infrastructure spending may lose
National elections are set to take place in some momentum.
India, Indonesia, Thailand and possibly
Singapore. While we expect no fundamental
shifts in any of these markets, the key things Singapore
we’ll be watching for are listed below. For a The next general election will
list of other political events, please refer to likely be held in 2020, before the
the political calendar on page 11. current parliament’s term ends
in January 2021. As the newly appointed
first assistant secretary-general, current
India Finance Minister Heng Swee Keat will likely
The next general election will run as the next leader of the ruling PAP. His
most likely be held in April or long experience in the civil service and as
May 2019. While opinion polls the former head of the Monetary Authority
suggest that the ruling Bharatiya Janata of Singapore puts him in good stead to
Party is likely to win again, we believe it ensure policy continuity.
could lose its current majority, forcing the
party to rely on an unwieldy coalition that
may dilute the current government’s reform Thailand
agenda. The higher policy uncertainty and Free elections, officially set to
weaker reformist credentials might be a take place between 24 February
catalyst for the historically high equity and 9 May 2019, will likely gen-
valuation multiple to correct further. erate positive sentiment both at home and
abroad for a return to democratic politics in
Thailand, assuming no major hiccups or con-
Indonesia troversies. Some pre-election stimulus has
We expect manageable political already occurred in 4Q18, which could help
risk for the 17 April election. lift private consumption and investment in
Joko Widodo, the incumbent, the seasonally strong first quarter in 2019.
leads the survey polls, controls a coalition The key risks relating to the elections include
that collectively holds about 60% of the a tactical delay toward the latter end of the
legislative seats and enjoys better Muslim electoral window, a potential delay in
credentials thanks to his appointment of announcing the election results and, based
Ma’ruf Amin, a prominent Islamic scholar, on past history, delays in forming a new
as his running mate. That said, religious cabinet after the results are announced.
tensions and the rupiah remain the key fac- These risks would create government policy
tors we’re monitoring. Social spending is uncertainty and could impact public spend-
likely to speed up ahead of the election, ing, corporate capex, foreign direct invest-
benefiting mid-to-low income earners, ment and consumer sentiment.
20 UBS CIO GWM December 2018Investing in Asia Pacific
Idea 4
Technology: The tug of war –
innovation vs. regulation
Sundeep Gantori, Analyst
Carl Berrisford, Analyst
Hyde Chen, Analyst
The regulatory backlash in 2018 is unlikely to fintech, gaming, online education and online
derail the long-term growth prospects of travel. These sub-sectors account for almost
Asia’s innovative industries, and we continue 38 unicorns, with a combined valuation of
to expect them to disrupt traditional industries around USD 84bn, and create significant dis-
in the years ahead. While uncertainty may ruption in China, driving annual sales close to
persist in the near term, we see opportunities USD 1.4trn and registering 25% revenues
in public markets following the 2018 sell-off growth over the past few years. (The long-
and in private equity for longer-term investors. term growth potential for these industries is
addressed in our past Shifting Asia
Asian innovation boom continues
The 2018 Bloomberg Innovation Index has
experienced two significant milestones in
2018. First, the US dropped out of top 10 for
the first time in six years with a new ranking China’s innovation gap with US is narrowing
of 11. Second, China jumped two places to Innovation score
19, entering the top 20 for the first time. 95
While other Asian countries like South Korea
90
(firmly in first) and Singapore (moved up three
spots to third) continue to top the index, our 85
key takeaway from this ranking shift is that 80
the innovation gap between China and the
75
US is narrowing. China continues to impress
70
on patent activity with a global ranking of 6.
Its ascent is perhaps best epitomized by the 65
jump in the number of unicorns, or unlisted 60
start-ups valued at more than USD 1bn, to 83
55
currently from 55 at this time in 2017. 2013 2014 2015 2016 2017 2018
US
Notably, the list of Chinese unicorns is domi-
China
nated by what we call the “secular seven”
Source: Bloomberg Intelligence, UBS, as of November 2018
industries: advertising, biotech, e-commerce,
UBS CIO GWM December 2018 21Investing in Asia Pacific
publications “The road to cashless societies,” these companies adjust to the “new normal”
“China’s biotech revolution,” and “Ahead of of greater scrutiny – but they should still
the game.”) deliver growth rates well in excess of nominal
GDP growth thanks to strong secular opportu-
Impact of regulations: shaken but not nities. For most innovative industries in China,
stirred we now expect 15–20% revenues growth
However, public markets have told us a differ- rates over the next few years (versus 20–25%
ent story in 2018 – the share prices of compa- previously). Such growth rates – still impressive
nies in the “secular seven” industries have considering Asian market revenues are grow-
been hit hard by new regulations in China. ing by 5–10% annually – should be achievable
Tech stocks corrected by 30–40% as consen- as these industries gain market share from and
sus revised down earnings estimates, flagging disrupt traditional industries.
short-term growth concerns. The question
remains whether the cloud of uncertainty will Key to our view is our belief that the intention
eventually lift as regulators clarify the rules of of the Chinese government is not to deter, let
the game, or if regulations will permanently alone to damage, innovative or online business
derail the long-term growth potential of Chi- models. Instead, regulations are intended to
na’s innovative industries. prevent excesses, improve user protection, and
drive healthier and more sustainable growth.
The brief history of such innovative industries For instance, the new nationwide drug tender-
in China makes it hard to predict when regula- ing system in China’s biotech space is a posi-
tory pressures might cool down. However, les- tive long-term development, in our view, given
sons from the regulations of innovative com- the government’s ambition to shift drug cost
panies in other countries lead us to believe reimbursements away from cheaper generics
that growth rates may reset only slightly as and toward higher-priced innovative and bio-
Summary of key regulations affecting innovative industries in China
By industry and regulation in China
Industry Regulation
Biotech Nationwide drug tender system triggered concerns over generic drug prices.
E-commerce New e-commerce law effective 1 Jan 2019. Increased tax burden and user protection.
Fintech New online lending rules and reserve requirements for payment companies.
Gaming Suspension of new game approvals and comments on near-sightedness effect of games.
Online advertising Network security regulations to protect data privacy.
Online education New education-related regulations including tax obligations.
Online travel No default cross-selling and increased user protection.
Source: Company reports, UBS, as of November 2018
22 UBS CIO GWM December 2018Investing in Asia Pacific
logic drugs, for which demand is high but companies in the fast growth, low regulation
affordability is low. Similarly, regulations in part of the matrix provides relatively less near-
gaming, online travel and e-commerce are term risks – i.e. online advertising. We also
meant to maintain high-quality content, reduce believe the worst risks to online travel are
addiction and offer user protection. behind us, although growth rates for the indus-
try are lower than peers’. The other industries
Where are the pockets of opportunities? like biotech and gaming have more near-term
For longer-term investors, we believe most of regulatory risks but, as highlighted earlier, have
these innovative industries now offer appealing robust structural growth prospects. In addition
entry points given attractive valuations. Tactical to public markets, investors could seek oppor-
investors could reference our matrix below tunities in the private equity space to gain expo-
comparing the seven industries’ growth rates to sure to Asian innovations – in areas like artificial
their regulatory environment (on a scale of 1–5 intelligence and healthtech, where regulatory
with 5 being the most regulated). We believe risks are limited at this stage.
Regulation and growth matrix for
innovative industries in China
Regulation score (scale: 1–5, y-axis) and
Industry’s growth opportunities (%, x-axis)
0
Medium growth, Fast growth,
low regulations low regulations
1 70
2 120
3 30 1,100 45 6.5
4 38
Medium growth, Fast growth,
high regulations high regulations
5
0 12 24 36
Fintech E-commerce Online education Online travel
Gaming Advertising Biotech
Note:
Bubble size indicates industry size in USD bn.
Regulation score based on a scale of 1–5, with 5 being the
most regulated
Industry’s growth opportunities over the next few years
based on %
Source: Company reports, UBS, as of November 2018
UBS CIO GWM December 2018 23Investing in Asia Pacific
Idea 5
Asia real estate: Headwinds
but no recessions
Eva Lee, Head Hong Kong Equity
Wen Ching Lee, Analyst
The real estate markets of key Asian cities are in mind though that any potential price
facing headwinds from a mix of restrictive decline in Hong Kong and China follows a sig-
housing policies, slower economic growth and nificant rally; since 2010, home prices have
tighter liquidity conditions. That said, supply- risen 130% in Hong Kong, 40–50% in China’s
demand dynamics are largely balanced region- lower-tier cities and 7.5% in Singapore.
ally and a major price correction remains
unlikely in the key locations. We expect home
prices to stay largely stable in Singapore and
to decline 10–15% in Hong Kong over the
next 12 months. As for China, prices in higher- UBS Global Real Estate Bubble Index
tier cities should stay relatively resilient but Latest index scores for the housing markets of select cities
could decline 5–10% in lower-tier cities. Keep –0.5 0 .5 1.5
Hong Kong 2.03
Munich 1.99
Toronto 1.95
Vancouver 1.92
Substantial consolidation in Amsterdam 1.65
China housing market London 1.61
The market share of top 10 Chinese developers, in % Stockholm 1.45
>40%
45 Paris 1.44
40 San Francisco 1.44
>35%
33%
Frankfurt 1.43
35
27.5%
Sydney 1.29
30 Los Angeles 1.15
20.1%
25 Zurich 1.10
18.7%
17.7%
Tokyo 1.09
14.2%
14.6%
20
12.7%
Geneva 0.68
11.3%
15
9.1%
New York* 0.68
8.6%
6.7%
10
5.4%
Boston 0.45
5 Singapore 0.44
0 Milan 0.03
Chicago –0.62
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
1H18
2018E
2020E
bubble risk (>1.5) fair-valued (–0.5 to 0.5)
overvalued (0.5 to 1.5) undervalued (–1.5 to –0.5)
Source: Company data, Citi research, UBS, as of November 2018 Source: UBS * Index altered due to data source revision.
24 UBS CIO GWM December 2018Investing in Asia Pacific
China: Large cities supported by policy growing economy, tight supply and low inter-
and market dynamics est rates have fueled the 130% rise in home
Housing sales volumes in China are likely to prices for the past eight years. But as rates rise
decline 7–10% in 2019, in our view, after – 3M HIBOR is up 130bps over the past two
increasing 1% in 2018, as the economy slows years to 1.97% – and as the Chinese and
and the government scales back compensations Hong Kong economies slow, we believe prop-
under its shantytown housing scheme. Property erty prices are likely to soften by 10–15% in
values in top-tier cities should soften somewhat, the next 6–12 months. A record-high price-to-
though tight capital controls and gradually income ratio, at 17.2x in 2017 from 9.4x in
expanding money supply should help offset any 2010, remains a key concern. Already, we
activity-related weakness. Also, industry consoli- have seen a 5ppt decline in home prices since
dation and healthier inventory levels have the peak in August 2018, the first reversal
reduced the risk of a selling spree in the dis- since mid-2015. That said, we think interest
tressed market. The industry has consolidated rates need to rise another 75–100bps for
markedly in recent years – the market share of negative carry to start biting. Barring a severe
the top 10 Chinese developers increased from economic downturn in China, we believe the
20% in 2016 to 34% by end-1H18. Meanwhile, tight supply of planned completion should
housing inventories have improved to around 11 limit the decline of HK home prices.
months now from an average of 18 months dur-
ing the 2015/16 downturn. But for the low-tier In the next 12 months, we expect both the
cities, where prices have risen strongly in recent 3M SIBOR and the 3M HIBOR to reach 2.5%
years, we see a greater risk of a correction. on the back of further rate hikes by the
Federal Reserve.
Singapore: Affordability improved,
restrictive policy a damper
Rising interest rates – 3M SIBOR now at a
10-year high of 1.76%, or +90bps since the low
in 3Q16 – have put the spotlight on the Monetary liquidity is a key driver for
China property sales
Singapore property cycle. Still, tight government
National sales y/y growth vs. M2 y/y growth, in %
policy, not rates, has been the real damper on
120 30
Singapore’s home prices, which rose just 0.5%
100
in 3Q18, the slowest pace since prices bot- 25
80
tomed in 2Q17. That said, we see fundamental
60
support from a robust employment outlook and 20
40
better affordability. The unemployment rate, at
20 15
2.1% in 3Q, will likely remain low at around
0
2.5% in the next two years. Meanwhile, the 10
–20
price-to-income ratio has since improved from
–40 5
7.3x in 2010 to 4.8x in 2017.
1Q08
1Q09
1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q18
Hong Kong: Rising rates hurt, National primary sales - commodity building (in % y/y, LHS)
but economy matters more M2 supply (in % y/y, RHS)
House prices in Hong Kong are strongly corre-
Source: NBS, CEIC, Citi Research, UBS, as of November 2018
lated to the city’s economic outlook. A steadily
UBS CIO GWM December 2018 25Investing in Asia Pacific
Idea 6
Search for yield: Stay safe
Timothy Tay, Head APAC Credit
Hartmut Issel, Head APAC Equity
Teck Leng Tan, Analyst
2018 was a difficult year for investors pursu- yield spread over the local government 10-year
ing yield strategies; bonds and dividend-yield- bond – which is likely to be sustainable. Inves-
ing stocks recorded negative returns due to tors looking to enhance yields through a diver-
rising interest rates, widening credit spreads sified portfolio of high and sustainable divi-
and a stock market correction. With overall dend-yielding stocks should also consider REITs
bond and dividend yields higher (JACI Com- in Singapore and Hong Kong.
posite now yields 5.8% versus 4.6% at the
start of 2018), we see some opportunities for Bonds – Attractive valuations, but mind
investors, especially in low-beta instruments the near-term market volatility
that offer safe carry, which should help insu- We remain selective in our fixed income strat-
late against near-term volatility. We expect the egy despite attractive valuations, as market
Fed to raise interest rates up to three times volatility is likely to stay elevated. Higher rates
before 2019 ends, and for the 10-year US
bond yield to be at 3.20% in 12 months.
Equities – Income growth and safety in Asia credit yields have risen substantially
some unexpected places In %
Income-oriented investors tend to focus first 5.5 10
on bonds, while Asian stocks’ overall 3% divi-
dend yield also looks less appealing in compar- 5.0 9
ison. However, we see pockets of high-yielding
4.5 8
equity investments that are worth exploring.
Chinese banks now yield over 5% and offer 4.0 7
one of the highest dividend growth rates
3.5 6
among key Asian sectors. They also pay out
just one-third of their earnings, which helps 3.0 5
anchor dividend sustainability even during Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Oct-18
market turbulence. From a country perspec- JACI IG YTM (in %, LHS)
tive, Thailand and Taiwan stand out for their JACI HY YTM (in %, RHS)
relatively rich offering of high-yielding stocks.
Source: JP Morgan, Bloomberg, UBS, as of November 2018
Taiwanese banks, for example, boast a high
26 UBS CIO GWM December 2018Investing in Asia Pacific
and a flattened US Treasury yield curve have Rising funding costs and currency
dampened the search for yield, reversing the mismatches are potential risks
trend of credit spread compression. We The funding costs of bond and stock carry
expect credit spreads to remain range bound trades have increased substantially since the
from here as investors re-focus on corporate beginning of 2018 (3-month LIBOR is now at
fundamentals in their valuation of bonds. A 2.7% versus 1.7% back then, and is projected
positive outcome is that credit spread differ- to rise to 3.3% by end-2019), which render
entials between rating categories have wid- the past strategy of borrowing to fund
ened over 2018, signaling better credit quality low-yielding bonds ineffective. We remain
differentiation. Within investment grade (IG), cautious about using leverage to magnify
we prefer select BBB government-related issu- returns, especially for lower-yielding assets
ers in China and Tier 2 financials in Asia, including single A bonds. An alternative carry
yielding about 5% for a 3–5-year duration. strategy is to borrow in currencies such as the
For high yield (HY), our preference is for CHF or the JPY, as the funding costs remain
short-dated (1–3 years) fundamentally low. However, we are mindful of the foreign
stronger BB issuers, yielding about 7.5% for a exchange risk from currency mismatches.
3-year duration. A key risk characteristic of safe-haven
currencies is their inverse correlation to general
risk sentiment. Both the CHF and the JPY tend
to rally during periods of risk aversion,
exposing investors to higher volatility.
Yield-seeking investors can look for opportunities in stocks
Comparison of income opportunities by country and sector
Current Yield spread (%) vs Payout Dividend growth
dividend yield local 10Y govt bond ratio (FY 2019)
Taiwan 4.4% 3.5% 53% 6.5%
By country
Thailand 3.0% 0.2% 43% 7.0%
China banks 5.3% 1.8% 34% 8.0%
Hong Kong REITs 4.2% 1.8% 97% 3.5%
By sector
Singapore REITs 5.2% 2.7% 97% 2.3%
Taiwan banks 4.7% 3.8% 54% 6.0%
Source: Bloomberg, UBS, as of November 2018
UBS CIO GWM December 2018 27Investing in Asia Pacific
Idea 7
Japan: Be selective
Daiju Aoki, Regional Chief Investment Officer & Chief Japan Economist
Toru Ibayashi, Head Japan Equity
Chisa Kobayashi, Analyst
Teck Leng Tan, Analyst
It’s been a difficult year for Japanese equity opportunities in select blue chips whose valu-
investors in 2018 – the TOPIX fell by more ations have fallen to unduly low levels and
than 10% and volatility was elevated. We companies involved in digital payments, and
have been neutral all year in our global tacti- focus on longer-term themes like ESG leaders.
cal asset allocation and, at this stage, we look
to stay that way in 2019 over concerns about Beginning of the end of Abenomics
Abenomics’s future and Bank of Japan (BoJ) Abenomics is based upon the “three arrows”
normalization. This said, within Japan, we see of monetary easing, fiscal stimulus and struc-
tural reforms, all of which we see as having a
lesser focus in 2019. With Prime Minister
Shinzo Abe in his final term, we think his
attention will shift to his longstanding ambi-
tions of reforming the constitution and hiking
TOPIX 500 net profit growth the VAT (from 8% to 10%). Furthermore, the
Excluding financials, actual/CIO forecast (y/y, in %)
BoJ is planning to normalize policy in many
70
63%
ways that run counter to Abenomics – less
60 59% purchases of Japanese government bonds
50
(JGBs) and ETFs, which would lead the
10-year JGB yield higher (0.2–0.3%).
40
30 Macro-related headwinds and weak net profit
22%
20 growth – we forecast –2% for the 2018 fiscal
14%
year and 0% for 2019 – means we see little
10
4%
2% upside for Japan’s stock market relative to its
0%
0 global peers in 2019. Within Japan, however,
–2%
–10 we see tactical buying opportunities in blue
chips as they seem oversold, with some P/E
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19E
Mar-20E
ratios dropping by more than 15% after no or
only marginal adjustment to earnings
Source: Bloomberg, UBS, as of November 2018
expectations.
28 UBS CIO GWM December 2018Investing in Asia Pacific
Economic growth above trend (53%) and the global average (26%), while
Decelerating global growth, especially in Japan’s overall ESG rating is slightly higher
China, and ongoing uncertainty over US auto than the global average. Japan’s GPIF, the
tariffs, which we expect to be mitigated by world’s largest pension fund, and the BoJ are
concessions, should continue to weigh on sen- pushing for ESG-related initiatives, which
timent and the equity market in 2019. Still, we could be a catalyst for change in corporate
expect growth to remain above trend in 2019, labor practices and governance overall.
supported by a moderate acceleration in wages
and capex due to the tightening labor market,
which should lift domestic demand. With Japanese companies are likely to hire
Japan’s unemployment rate already below more foreigners in coming years
2.5%, companies need to hire more foreigners Number of foreign workers (ten thousands, LHS) and
to fill vacancies and invest to improve labor ratio of foreign labor forece to total labor force (%, RHS)
efficiency. Capex plans, which are already at 320
315.9
8
their highest level in over 20 years, are there- 280 7
fore set to climb even higher in 2019. 240 6
200 5% 5
190.9
Meanwhile, we expect USDJPY to fall to 110 in 160 4
three, 107 in six and 105 in 12 months. In the 127.9
120 3% 3
short term, USDJPY could sustain in a 110–115
80 2% 2
range with the Fed hawkish and the BoJ dovish.
But we expect the pairing to embark on a 40 1
downtrend by mid-2019, when the Fed likely 0 0
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
turns more neutral given the advanced stage of
the cycle and the BoJ starts to guide policy rates Specialized and technical sectors (LHS)
higher on the back rising inflation expectations. Designated activities (LHS)
Skill training (LHS)
Japan embraces sustainable investing Overseas activities such as studying abroad (LHS)
Despite its early stage in Japan, we think sus- Resident, permanent resident and his/her spouse (LHS)
tainable investing has great potential and UBS view (total number of foreign workers,
in ten thousands, LHS)
could attract sizeable sums of investment in
Ratio of foreign labor force to total labor force (%, RHS)
the coming years. Japan’s ESG penetration in
investment assets is still low (3.4% out of Source: Ministry of Health, Labour and Welfare, UBS,
as of November 2018
total manages assets) compared to Europe
ESG/Sustainable Investing Considerations: Sustainable investing strategies aim to consider and in some instances
integrate the analysis of environmental, social and governance (ESG) factors into the investment process and portfolio.
Strategies across geographies and styles approach ESG analysis and incorporate the findings in a variety of ways.
Incorporating ESG factors or Sustainable Investing considerations may inhibit the portfolio manager’s ability to participate
in certain investment opportunities that otherwise would be consistent with its investment objective and other principal
investment strategies. The returns on a portfolio consisting primarily of ESG or sustainable investments may be lower or
higher than a portfolio where such factors are not considered by the portfolio manager. Because sustainability criteria
can exclude some investments, investors may not be able to take advantage of the same opportunities or market trends
as investors that do not use such criteria. Companies may not necessarily meet high performance standards on all
aspects of ESG or sustainable investing issues; there is also no guarantee that any company will meet expectations in
connection with corporate responsibility, sustainability, and/or impact performance.
UBS CIO GWM December 2018 29You can also read
