Investing in Asia Pacific - Reflation and (still) reopening - UBS
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
A monthly guide to investing in Asia Pacific financial markets
Investing in Asia Pacific
June 2021
Chief Investment Office GWM
Investment Research
Reflation and
(still) reopening
Contents
03 Editorial 18 Investment spotlight
The reflation themes
06 Asia monthly outlook 20 Asset class preferences
Reflation and (still) reopening
11 Tactical views 21 UBS APAC forecasts
12 Asset allocation
13 Equities
14 Japanese equities
15 Bonds
16 Currencies
17 Commodities
Investing in Asia Pacific Cover picture
This report has been prepared by UBS AG Singapore Branch, Gettyimages
UBS AG Hong Kong Branch, UBS Securities Japan Co., Ltd.,
Editorial deadline
UBS Switzerland AG, UBS AG London Branch and UBS Financial Services Inc.
21 May 2021
Editor-in-chief Languages
Wayne Gordon Published in English, Chinese (Traditional and Simplified)
Product management Translations
Rajesh Donthula* Rachel Lee
Sita Chavali Bianhua Gao
Danjun Zheng
Investment writer
Aaron Kreuscher Contact
ubs.com/cio
Editors
Aaron Kreuscher
Murugesan Suppayyan
* An employee of Cognizant Group.
Desktop publishing
Cognizant staff provides support services to UBS.
Pavan Mekala*
Important disclosure
Please see the important disclaimer at the end of the document.
Please note there may be changes to our house view strategies prior to the next edition of Investing in Asia Pacific. For all updated views, please
refer to the UBS House View Monthly Extended at any time of the month or contact your advisor.
2 Investing in Asia Pacific June 2021
Editorial
Coronavirus cases are increasing across the region. Singapore and Taiwan have
issued mobility restrictions, while rising infections in Malaysia raise the risk of a
total nationwide lockdown. Vaccination rates are moving ahead, but not quickly
enough to curb the spread of the virus due to a lack of supply.
Asia’s reopening has reversed for the moment, but this should change in the second
half of the year. With added urgency, governments are likely to speed up their
vaccination schedules—particularly given the effect vaccines have had on containing
the virus’s spread in countries like the US and the UK. We’ve seen this already in
markets that handled the earlier waves relatively well like Singapore and China.
Mark Haefele
Economies, meanwhile, are still humming. Exports and industry, which remain key to
Chief Investment Officer
the region’s economic cycle, are recovering alongside the global economy. Global Wealth Management
Importantly, central banks in the region—like their peers in the developed markets—
are likely to look beyond the spike in inflation and stay accommodative this year.
Beijing, too, has committed to keeping policy supportive to even out its recovery.
So, while services will likely take a temporary hit, we still expect economic growth
overall to accelerate into the mid-teens in 2Q. Producer prices are on the rise
thanks to the low comparable base from last year and surging commodity prices.
But the pass through to consumer prices in Asia will likely be limited—the job
market here is not as tight as in the US, and there is a lot less stimulus flowing
through the region’s economies.
Conditions remain supportive for equity markets, in our view, even in the COVID-
hit markets. Investors appear to share this view: India’s equity market has
outperformed most of the region in the past four weeks, while Singapore and Min Lan Tan
Taiwanese stocks have started to recover shortly after they sold off following the Head Chief Investment Office APAC
Global Wealth Management
announcement of new mobility restrictions.
With earnings expected to grow 30% this year—of those that have reported,
earnings for 1Q were up 50% y/y—we anticipate mid-teens returns for the
MSCI Asia ex-Japan for the rest of this year. Hence, we remain risk-on in the
region with a continued preference for sectors that should benefit from regional Follow us on
reopening, global reflation and US stimulus—i.e., capital goods, construction
materials, consumer services, transportation, banks, and metals & mining.
linkedin.com/in/markhaefele
We prefer China, India, Malaysia and Singapore equities, as well as Asia high yield over linkedin.com/in/minlantan
investment grade bonds. With some uncertainty clearing, certain Chinese tech stocks
are also looking attractive for long-term positioning after months of facing regulatory
pressure. Outside of Asia ex-Japan, we have shifted Japan to Most Preferred. twitter.com/UBS_CIO
For a while now, we have advocated that markets won’t move in a straight line up
and inevitable spikes in virus cases will result in market swings. Diversification is
essential, and investors could consider taking advantage of the volatility.
Mark Haefele Min Lan Tan
Investing in Asia Pacific June 2021 3
Asset class views
Asset allocation
• We like six industries related to reopening and reflation in Asia.
• Upgrade Malaysia to Most Preferred.
• Downgrade Indonesia to Least Preferred.
Equities
• Earnings to grow 30.5% y/y in 2021. 1Q21 earnings results show a
robust earnings recovery, with two-thirds of companies beating
expectations.
• In tech, supply-demand dynamics favor Korea. Taiwan’s outlook is
more mixed.
• Mid-teens upside for Asia ex-Japan stocks by year-end. Within the
region, we prefer diversified exposure among reflation beneficiaries and
quality cyclical names.
Japanese equities
• Accelerating vaccinations are key. Japan’s COVID-19
vaccination progress has been much slower than other
countries, at just 2%–3% of the total population.
• Most service industries should turnaround in 2H21.
As the economy opens up, earnings should continue
recovering until the September 2021 quarter.
• We expect USDJPY to rise steadily toward 115 by
end-2022.
Bonds
• Asia HY credit is favored over IG.
• Asia HY to keep outperforming. Asia HY added around 1.2% to
its year to-date returns (2.2%) in the past month, while Asia IG
stayed flat with –2.0% returns.
• India rating downgrade unlikely. We expect rating agencies will
take a more medium-term view on the country.
Currencies
• We see upside potential for APAC currencies over the next
3–6 months.
• The window of USD weakness is likely to close toward
late 2021. We expect APAC currencies to come under pressure
versus the USD, with the exception of the THB.
• Currencies highly sensitive to a rise in US yields (such as
the JPY) are likely to underperform.
Commodities
• Commodities remain Most Preferred. Broadly diversified commodity indices to deliver mid-to-high
single-digit total returns over the next 6–12 months.
• Stay long crude oil and energy equities. Energy companies have lagged crude oil; we expect a catch-up
in the coming months.
• Food prices remain a risk. Prices of grains and other food-related commodities have risen sharply this year.
4 Investing in Asia Pacific June 2021
How to invest
Equities
• Select reflation beneficiaries, especially in capital goods, construction materials,
consumer services, transportation, banks, and metals & mining industries.
• Leaders in internet and quality cyclical sectors. We remain constructive on
reasonably priced names in internet and technology (especially memory).
• Structural opportunities such as subscription champions in Asia, China greentech,
the 5G supply chain, China's digital economy, and ASEAN's new economy.
Japanese equities
• Japan’s normalization after vaccination
• Underperformed quality stocks in Japan
• Green-tech driving Japan
Bonds
• In IG, we prefer India BBB up to 5-6 years and avoid
long duration single-A bonds and Indonesia BBB.
• In HY China property, we avoid BB bonds below 4%
and prefer bonds that have underperformed recently.
Currencies
• We like commodity-linked currencies (AUD) and
reopening beneficiaries (THB and SGD).
• Long SGDJPY.
• Yield-enhancement for USD holdings – we like to sell
USDCNY’s upside risk over the next three months.
Commodities
• Long crude oil.
• Long base metals.
Investing in Asia Pacific June 2021 5
Asia monthly outlook Reflation and (still) reopening • The hiccup in reopening may dent but won’t stop the recovery. • The GDP numbers for Taiwan, Korea, Hong Kong and Singapore all beat consensus 1Q estimates. • We continue to believe Mainland China’s tech sector remains well positioned to generate above-average, double-digit earnings growth rates. Adrian Zuercher, Head Global Asset Allocation; Philip Wyatt, Economist; Valerie Chan, Analyst; Crystal Zhao, Strategist; Wen Ching Lee, Analyst; Hartmut Issel, Head APAC Equity; Sundeep Gantori, Analyst; Giovanni Staunovo, Analyst; Devinda Paranathanthri, Analyst; Teck Leng Tan, Analyst; Wayne Gordon, Analyst; 6 Investing in Asia Pacific June 2021
There are two key forces driving financial markets globally: COVID spike adds urgency
the reopening of economies from the pandemic and rising
inflation following last year’s standstill in activity. Taiwan and Singapore—two of the fastest locations to
contain their situations—have seen spikes in new COVID-19
The recent surge in coronavirus cases in Asia has stalled the cases, while India continues to suffer and Malaysia may
region’s reopening, but it won’t derail it. Investors appear impose tighter restrictions as cases climb. Governments have
to share this sentiment, as the financial markets of the since tightened restrictions and partially reversed the
affected regions have generally sailed through the new reopening of their economies. The upside is that
wave of mobility restrictions. Reflation, meanwhile, is very governments may hasten their projected inoculation
much alive, with consumer prices on the rise in both the schedules as a result.
US and Asia.
Singapore and mainland China lead the vaccination roll-out
Policy support remains ample, vaccinations are regionally, with respectively 34% and 30% of their
accelerating, and the global recovery continues to gain populations vaccinated with a minimum of one dose. Hong
pace. So, despite the recent headwinds, we remain risk-on Kong, India and Korea are catching up, while the rest of
in Asia and stick with our conviction to be long equities Asia is much slower. Based on the current run-rate,
versus bonds, to focus on reopening and reflation Singapore and mainland China will reach herd immunity by
beneficiaries, and to pick Asia high yield over investment the end of this year, closely followed by Hong Kong in
grade. Select growth segments are also becoming 1Q22.
attractive for long-term positioning.
These timelines can leap once new supplies arrive, and
bottlenecks to obtaining doses appear to be easing.
Increasing vaccination rates should give governments the
confidence to ease restrictions and reopen over the coming
months.
Other than Mainland China and Singapore, rest of Asia expected to achieve herd immunity from 2022
onwards
Estimated months to fully vaccinate 70% of population
Daily vaccination rate 70% of population Months Months Months Govt
(7DMA, as of 16 May, with two doses Total doses YTD to herd to herd to herd end-Dec target
thousands) (no. of doses, mn) (no. of doses, mn) (1x rate) (2x rate) (3x rate) (% of popn)
Mainland China 11,804.4 1,956.8 406.9 4.4 2.2 1.5 60
Singapore 32.9 8.0 3.2 4.8 2.4 1.6 100
Hong Kong 30.5 10.5 2.0 9.4 4.7 3.1 100
Australia 62.1 35.5 3.1 17.4 8.7 5.8 100
New Zealand 11.7 7.0 0.4 18.7 9.4 6.2 70
Japan 239.4 176.8 6.1 23.8 11.9 7.9 –
India 1,992.3 1,913.0 182.3 29.0 14.5 9.7 40
Korea 70.5 72.4 4.7 32.0 16.0 10.7 100
Thailand 64.9 97.5 2.3 48.9 24.4 16.3 45
Philippines 75.1 151.4 2.9 65.9 32.9 22.0 51
Malaysia 21.3 44.7 1.9 67.0 33.5 22.3 48*
Taiwan 14.7 33.0 0.2 74.6 37.3 24.9 –
Indonesia 104.0 378.9 22.7 114.2 57.1 38.1 50*
European Union 3,004.1 626.6 196.4 4.8 2.4 1.6 –
United Kingdom 519.4 93.6 56.7 2.4 1.2 0.8 –
United States 1,975.5 459.5 273.5 3.1 1.6 1.0 –
World 24,160.2 10,743.1 1,474.3 12.8 6.4 4.3 –
*estimate based on 2022 target
Source: OWID, CEIC, UBS, as of 16 May 2021
Investing in Asia Pacific June 2021 7
COVID-19 vaccine doses administered per
100 people
Asia lagging, but coming up
140
120
100
80
60
Inflation in the region should
40
be at or exceed pre-COVID
rates by year-end - CPI to over 20
2.5%
0
Dec-20 Jan-21 Feb-21 Mar-21 Apr-21
Asia US UK
Germany Israel
Source: ourworldindata.org, UBS, as of May 2021
Expansion, reflation in full swing
The hiccup in reopening may dent but won’t stop the In the quarters ahead, Asian profits should continue to be
recovery. Consumption of services will likely take a hit, but driven by supply-chain re-stocking. But once inventories
factories are open and the global upswing is speeding normalize, the upward pressure on manufactured goods
ahead. So we expect economic growth for Asia ex-China prices and commodity prices should taper off into 2022.
to keep accelerating, reaching a mid-teens rate in 2Q. The
expansion will likely steadily slow in 2H, with exports and
economic growth losing some steam but staying above
trend. India’s recovery, however, will likely be delayed by a
quarter because of the lockdowns and high virus count. We expect reopening
The GDP numbers for Taiwan, Korea, Hong Kong and
sectors, such as consumer
Singapore all beat consensus 1Q estimates. And given our services and
growth forecast for 2Q, rising commodity prices and tight transportation, to catch
supply, we expect inflation in the region to rise to or
exceed pre-COVID rates by the end of the year (CPI to over up with reflation sectors
2.5%, PPI to over 5%). But this shouldn’t prompt rate when economies
hikes until next year given that economic activity still
remains below 2019 levels; some normalization in policy
gradually reopen.
support is likely, though, for the economies further ahead
in their recovery.
8 Investing in Asia Pacific June 2021
Continue to position for reopening and …and tweak tech
reflation…
The market reaction to the latest developments has been Growth stocks are being hit globally by expectations of
quite manageable. In fact, Indian equities have higher yields and Fed tapering. And in China, they’ve been
outperformed most of their regional peers in the past four roiled by Beijing's assertive regulatory actions, with the
weeks. Singapore took a 2% hit upon the news of rising well-known names down 15%–25% from their peaks in
cases, but recovered that loss in the following two days. mid-February. Beijing is likely to continue with its
Taiwan had a bigger drawdown of 9%, but it has regulatory drive in the months ahead, putting pressure on
recovered half of the loss so far as sentiment stabilizes. the entire industry and capping its upside. But eventually,
investors will likely return their focus to tech’s strong
We continue to recommend positioning in sectors that will fundamentals.
benefit from reopening or reflation. In Asia, we like six
industries that have been hard-hit by the pandemic and Here, we continue to believe Mainland China’s tech sector
have high earnings upside amid regional reopening, global remains well positioned to generate above-average,
reflation and US stimulus: capital goods, construction double-digit earnings growth rates. Depressed valuations
materials, consumer services, transportation, banks, and therefore offer long-term entry points for select leading
metals & mining. platforms with strong balance sheets, resilient cash-flows
and earnings visibility, in our view. It helps that Alibaba’s
This group offers solid earnings growth at reasonable fine, although large, is manageable in view of its robust
valuations—for 2021, it has an average P/E of 17.4x (vs. cash balance.
15.8x for MSCI AxJ) and a projected earnings per share
CAGR of 47.6% (vs. 30.7%). Of the six sectors, those Elsewhere, we think Taiwan’s supply chain won’t be
leveraged to reflation have fared better. Metals & mining disturbed by the lockdowns. So any weakness on such
have outperformed with a 64% year-to-date gain amid concerns could present opportunities. Also, Korea’s tech
rising commodity prices, while consumer services have fundamentals appear more resilient given the ongoing
underperformed with a meager 3% rise as lockdowns shortages in the memory industry and relatively attractive
hamper demand. valuations. We like Korean memory chip makers.
We expect reopening sectors, such as consumer services
and transportation, to catch up with reflation sectors when
economies gradually reopen. Investors, in our view, should
prioritize these segments when building exposure. The
uneven recovery trajectory, however, highlights the
Growth is trading at a steep premium to value
importance of being diversified across all six sectors.
Valuation gap is one standard deviation (STD) above historical average.
2.0
1.8
Value cheap
1.6
1.4
1.2
1.0 Value expensive
“ In tech, depressed
valuations offer long- 0.8
Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Nov-17 Nov-18 Nov-19 Nov-20
term entry points for
PE premium (Growth / Value) LT Average
select leading +1 STD -1 STD
platforms.” Source: Bloomberg, UBS, as of May 2021
Investing in Asia Pacific June 2021 9Where to invest?
We maintain our preferences for cyclicals/value
stocks which have lagged due to the stop-start
nature of reopening and/or are positioned to
benefit from elevated commodity prices/higher
global yields. In tech, we think small- to mid-cap
companies are more attractive than mega-tech,
particularly in areas like 5G, fintech, healthtech,
and greentech.
India, China, Singapore and Malaysia are In FX, we see tactical opportunities to be
Most Preferred, while Indonesia, Hong long commodity-linked currencies like the
Kong and the Philippines are Least Australian dollar and re-opening
Preferred. Outside of Asia ex-Japan, we beneficiaries like the Thai baht. The
have shifted Japan to Most Preferred. In Japanese yen also remains an attractive
Japan, we think the recent correction in segments with funding currency, in our view, and recommend shorting
the greatest exposure to domestic demand—like it versus the Singapore dollar.
airlines, retail and hotels—offers good entry points in
view of broader reopening later in the year.
In fixed income, Asia high yield (HY) credit In commodities, we expect broadly diversified
is Most Preferred over investment grade commodity indexes to deliver mid-to-high
(IG). Within HY, we like select short-dated single-digit total returns (including roll gains
bonds in the Chinese property sector that of more than 3%) over the next 6–12
have sold off. Also, we do not believe months. We prefer exposure to broad
India’s sovereign rating will be downgraded next year. commodities, crude oil and industrial metals as well the
Therefore, any further widening in India IG is a buying equities of global energy and producers of the materials
opportunity. used in the transition to a low carbon economy (e.g.,
copper and nickel).
10 Investing in Asia Pacific June 2021Tactical views
Asset allocation
Equities
Japanese equities
Bonds
Currencies
Commodities
Investing in Asia Pacific June 2021 11Tactical view
Asset allocation
Adrian Zuercher, Head Global Asset Allocation
Crystal Zhao, Strategist
Current positions and changes
We like six industries related to reopening and • Within fixed income, we still like Asia high yield (in
reflation in Asia. USD) and China onshore government bonds (CGBs,
in CNY). Asia HY offers 7.1% yield with a 3-year duration,
Upgrade Malaysia to Most Preferred. and we expect further spread tightening by the year-end
as fundamentals recover. CGBs are a good diversifier of
Downgrade Indonesia to Least Preferred. G3 risk-free bonds, and they should benefit from the
expected CNY appreciation against the USD in the coming
months.
Asia investment thesis
• Meanwhile, we keep Asia investment grade as
• We remain positive on Asian equities via the value Least Preferred. So far in May, the Asia IG spread has
and cyclical parts. The recent rise in COVID-19 cases in widened 5bps as investors reprice weak Chinese state-
the region is a setback for reopening, but it’s likely to be owned enterprises and local government financing
temporary as vaccinations continue. We have selected six vehicles. We expect spreads to widen by a further 10bps
industries we think will benefit from the reopening and by the year-end.
reflation trends in Asia: capital goods, construction
materials, consumer services, transportation, banks, metals
& mining. These sectors have either suffered the most
from the pandemic (and therefore stand to gain the most
from reopening) or are positioned to ride the commodity
bull market/ higher global yields.
• Within equities, we have upgraded Malaysia to Most
Preferred from Neutral. Malaysia’s earnings have begun
a broad recovery, as seen in the market’s trailing EPS and Commodity upturn to support capital goods and
earnings revision breadth. With 40% bank and material metals & mining
exposure, it's a catch-up play on the value spectrum. 20 80%
Conversely, we have downgraded Indonesia to Least
Preferred from Neutral due to relatively weak earnings 15 60%
revisions and return on equity (ROE). This move can also
10 40%
work as a hedge to higher US yields or a peaking US ISM.
• China, Singapore and India remain our Most Preferred 5 20%
equity markets. China has corrected 20% from the
0 0%
February high due to growth to value rotation, domestic
tightening and anti-trust uncertainty. Analysts have revised -5 -20%
down the forward earnings outlook for Chinese mega-tech
companies in the past two months, pricing in the -10 -40%
headwinds weighing on the sector. We also expect ROE to
rise amid the strong commodity upturn. Singapore is likely -15 -60%
2010
2011
2006
2007
2008
2009
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
to continue to benefit from the reflation theme despite the
recent rise of virus cases, as it's leading the regional vaccine
China raw material PPI (in %, LHS)
race. Indian stocks have showed no reaction to the local
Average forward EPS* (RHS)
COVID situation so far. We think this is because the market
is already looking to its growth recovery, which has likely * average of 6 industries selected: capital goods, construction material, consumer
services, transportation, bank, metals & mining
been pushed out by a quarter. Elsewhere, Hong Kong and
Source: DataStream, Bloomberg, UBS, as of May 2021
the Philippines remain Least Preferred.
12 Investing in Asia Pacific June 2021Tactical view
Asia ex-Japan equities
Sundeep Gantori, Analyst
Delwin Kurnia Limas, Analyst
Key trends
• Earnings to grow 30.5% in 2021. 1Q results show a
robust earnings recovery, with aggregate bottom-line Related reports
growing c.50% y/y, based on companies that have • Position for Asia reopening & reflation,
reported (about half of MSCI Asia ex-Japan index). 15 April 2021
Two-thirds of the companies beat consensus • Opportunities in China greentech update,
expectations, led by Taiwan, Korea and Thailand. 22 March 2021
Materials, communication services and financials • Investing in digital subscriptions, 10 March 2021
registered the highest positive earnings surprise. Some reports may not be available for US clients.
• Favorable supply-demand dynamic to support
Korean tech, while Taiwan tech’s outlook is mixed.
We expect DRAM prices to grind higher until 2Q22,
supported by steadily rising hyperscale shipments over
the next few quarters. With operating margins still below
the past upcycle, we see earnings upside for Korean
memory names. Taiwan tech’s outlook is mixed,
however, due in part to the peaking utilization ratio for
key industries.
• Expect mid-teens upside until end-2021. Within the
region, we prefer diversified exposure among reflation
beneficiaries and quality cyclical names. Capital goods,
construction materials, consumer services, Strong 1Q results have driven upward earnings
transportation, banks, and metals & mining should revisions
continue to benefit from the reflationary backdrop. We Consensus 2021 and 2022 earnings
see attractive entry points in select internet and
65
technology names for longer-term positioning.
Key investment ideas
60
Select reflation beneficiaries, especially in capital
goods, construction materials, consumer services,
55
transportation, banks, and metals & mining industries.
See “Position for Asia reopening & reflation” and
“Twin-cities reflation” for more details.
50
Leaders in internet and quality cyclical sectors.
We remain constructive on reasonably priced names
in internet and technology (especially memory). 45
Dec 20 Jan 21 Feb 21 Mar 21 Apr 21
Structural opportunities such as subscription 2021 EPS
champions in Asia, China greentech, the 5G supply 2022 EPS
chain, China's digital economy, and ASEAN's new
Source: Bloomberg, Factset, UBS, as of May 2021
economy.
Investing in Asia Pacific June 2021 13Tactical view
Japanese equities
Daiju Aoki, Regional Chief Investment Officer & Chief Japan Economist
Toru Ibayashi, Head Japan Equity
Chisa Kobayashi, Analyst
Key trends
• Weaker yen. While the 10-year US yield is up at almost
1.7%, Japan’s long-term yield is still near zero. The JPY Related reports
has been one of weakest currencies against the USD for • Accelerating vaccination is key to Japan’s
the past six months, which should support exporters. normalization, 16 April 2021
A general election—possibly in September—would be • Sector rotation is key for 2021, 2 March 2021
another drag on the JPY. We expect USDJPY to rise • Be ready for Japan’s normalization,
steadily towards 115 by end-2022. 3 February 2021
Some reports may not be available for US clients.
• Corporate earnings are recovering. March 2021
quarterly results showed the strong earnings recovery is
continuing. As the economy opens up, earnings should
continue recovering until the September 2021 quarter.
• Accelerating vaccination is key. Japan’s COVID
vaccination progress has been much slower than other
countries, at just 2%–3% of the total population. But we
expect it to rise to 20%–30% in the next six months, With further earnings recovery priced in, investors
helping to re-open the economy.
should be selective and wait for a dip
Key investment ideas 1,800 32,000
30,000
1,600
5G is driving a digital shift in Japan. Prime Minister 28,000
Suga is strongly supporting a 5G-driven digital shift in
1,400 26,000
Japan. We like companies that are leading this
transition. 24,000
1,200
22,000
Japan’s normalization. As the global economy re- 1,000 20,000
opens, and with most governments supporting the
18,000
recovery, we think Japan’s service industries are well 800
positioned to take advantage. Japan’s vaccine 16,000
acceleration should help to normalize the economy. 600 14,000
Jan-18
Jan-19
Jan-20
Jan-21
Sep-18
Sep-19
Sep-20
May-18
May-19
May-20
May-21
More digital investment needed. The Suga
administration is setting up a new government Nikkie225 12-month fwd EPS (LHS)
organization to assist corporate and consumers' Nikkie225 (RHS)
digital shift. We expect greater support for related
Source: Bloomberg, UBS, as of 12 May 2021
programs, benefitting the companies involved.
14 Investing in Asia Pacific June 2021Tactical view
Bonds
Timothy Tay, Head APAC Credit
Devinda Paranathanthri, Analyst
Key trends
• Asia HY continues to outperform: Asia HY has added
around 1.2ppt to its year to-date returns (2.2%) in the Related reports
past month, while Asia IG has stayed flat with –2.0% • China Huarong Asset Management: Three
returns. We continue to believe Asia IG spreads could scenarios, 28 April 2021
widen around 5–10bps and Asia HY to continue its • China property: Play it safe, 12 April 2021
outperformance in the near term. Some reports may not be available for US clients.
• India rating downgrade unlikely. The recent pickup in
COVID cases in India has brought back worries of a
sovereign rating downgrade. But we believe this is
unlikely over the next 12 months, as we expect rating
agencies to take a more medium-term view on the
country. While near-term growth expectations need to
be tapered, we do not believe India has completely de-
railed from its recovery. Asia HY continues to outperform (YTD returns)
Asia HY outperformed IG by around 1.2% in the past month
• Look to engage India IG on any sell-off. A large 4%
portion of the India IG space is made up of state-owned
names whose ratings are linked to the sovereign. This 3%
2.2%
segment has widened by around 15bps in the past
2%
month, which we think is reasonable given the recent
negative developments. But given our view that the 1%
sovereign rating won’t be downgraded, we would buy
0%
on any further sell-off.
-1.0%
-1%
Key investment ideas -2.0%
-2%
China property. We see value in select shorter- -3%
dated single B bonds that have oversold recently.
-4%
JACI IG JACI JACI HY
Be selective in IG: We suggest moving to segments
that will likely be affected less by rate moves. Hence, UST return (%) Spread return (%)
we advise moving out of long-duration single A Total return (%)
bonds as well as Indonesia BBB bonds and into India
Source: JP Morgan, UBS, as of May 2021
BBB bonds and perpetuals with good structures.
Investing in Asia Pacific June 2021 15Tactical view
Currencies
Dominic Schnider, Head Commodities and APAC FX
Teck Leng Tan, Analyst
Wayne Gordon, Analyst
Key trends
• Further upside for APAC currencies in 2Q and 3Q.
Over the next 3–6 months, export-oriented Asian Related reports
currencies should find support from accelerating global • APAC currencies: A window of USD weakness,
growth momentum. Easy Fed policy is an ongoing 20 May 2021
tailwind; we expect the Fed to remain dovish over the • Asia’s re-opening beneficiaries - THB and SGD,
coming months, particularly amid the labor market’s 6 May 2021
uneven recovery.
• We’re cautious about end-2021/early 2022. Heading
into 2022, we expect the Fed to shift to a less
accommodative policy stance by tapering its asset
purchases. This would likely coincide with a moderation APAC currencies' 12-month return expectations
in global growth momentum into 2022, which would versus the USD
likely exert pressure on APAC currencies. Based on our end-June 2022 forecasts
8%
Key investment ideas
6%
We like commodity-linked currencies (AUD) and
4%
re-opening beneficiaries (THB and SGD). Higher
commodity prices should lift the AUD, while gradual 2%
resumption of international air travel should support
the THB and the SGD. 0%
-2%
JPY remains an attractive funding currency. We
expect the JPY to weaken to 112–115 versus the -4%
USD over the next 6–12 months amid widening US-
Japan yield differentials. -6%
MYR
AUD
CNY
JPY
IDR
INR
THB
KRW
PHP
NZD
TWD
Average
SGD
Yield-enhancement for USD holdings. We like to
sell USDCNY’s upside risk as a yield-enhancement Expected 12M spot return vs USD 12M yield carry vs USD
strategy over the next three months, given our Expected 12M total return
expectations for USDCNY to drift lower to 6.30 by
Source: Bloomberg, UBS, as of 20 May 2021
end-September 2021.
16 Investing in Asia Pacific June 2021Tactical view
Commodities
Dominic Schnider, Head Commodities and APAC FX
Giovanni Staunovo, Analyst
Wayne Gordon, Analyst
Key trends
• Staying positive. We believe the most important drivers
to support higher commodity prices are the global Related reports
economic recovery and an acceleration in the reopening • Understanding commodities - Introduction to
phase. We expect broadly diversified commodity indices commodities, 5 May 2021
to deliver mid- to high-single digit total returns over the • Copper: 10k not the top, 30 April 2021
next 6–12 months. • Crude oil: An uneven recovery for oil demand,
27 April 2021:
• We favor cyclical sectors. On a sector level, the
backdrop is most supportive for energy and base metal
prices while the improving global backdrop, higher real
interest rates and easing market uncertainties should
weigh further on gold.
• Food prices remain a risk. Prices of grains and other
food-related commodities have risen sharply this year. US
and Brazilian weather as well as Chinese demand is key
to crop price direction over the coming six months.
Key investment ideas
Staying long crude oil and energy equities: We
expect oil demand to rise from around 94mbpd Strong performance across most commodities
currently to above 99mbpd in 2H21, benefiting from Spot performance in 2021 in %
a faster vaccine rollout and less mobility restrictions. 70%
With only a modest production increase outside of
OPEC+ and OPEC+ pursuing a cautious approach, 60%
we expect the oil market to be undersupplied by
50%
1.5mbpday this year and forecast Brent will reach
USD 75/bbl in 2H21. Energy companies have lagged
40%
crude oil; we predict a catch-up in the coming
months. 30%
Base metals. Our call for higher base metal prices 20%
has received fresh support from a patient Federal
Reserve, firming global growth, which points to 10%
strengthening demand, and supply risks. While
copper has reached a new record high above USD 0%
10,000/mt, we still see further upside. With the
copper market in deficit, higher prices are needed to -10%
Brent
Zinc
Gold
Palm oil
Cotton
Cocoa
Gasoline
Platinum
Wheat
Soy. Oil
Corn
Soybeans
Lean Hogs
WTI
Heating Oil
Tin
Aluminum
Nickel
Silver
Sugar
Soy. Meal
Lead
Palladium
Live Cattle
Coffee
Copper
Nat. Gas (US)
either curtail demand growth or to encourage the
availability of scrap. Hence, we see copper rising to
USD 11,000/mt by end-September. Changes in
Chilean government policies are also a risk for
Source: Bloomberg, UBS, as of May 2021
copper supply ahead.
Investing in Asia Pacific June 2021 17Investment spotlight
The reflation themes
A very strong reflationary phenomenon is about to strike Asia as economies there
shift to a post-pandemic world. It consists of three main ingredients: (i) greater
pricing power for companies in sectors with limited supply facing bottlenecks in
2Q–3Q (consumer services and transportation); (ii) stronger economic demand
which drives up shipments against low inventories (select commodities and
manufactured products); and (iii) higher long-bond yields as the demand for credit
rises (beneficial to the financial sector).
Wen Ching Lee, Analyst; Dennis Lam, Analyst; Philip Wyatt, Economist; Valerie Chan, Analyst; Crystal Zhao, Strategist; Teck Leng Tan, Analyst
Twin-cities reflation: This year, we expect real Position for Asia reopening & reflation: As
economic growth to accelerate to around 5% in global vaccination progresses, we expect a
Hong Kong and 7% in Singapore, with nominal staggered re-opening of Asian economies which
growth 2ppt above this. Investors can exploit the will support cyclical equities. Investors may
Asia reflation idea in banking and property sectors in position for reopening as well as reflation in Asia by
Hong Kong and Singapore. So as the Mainland China-led focusing on six key industries: capital goods, construction
economic recovery broadens out globally, this should drive up materials, consumer services, transportation, metals &
demand for property and the financial services supplied by mining and banks. These were hit hard by the pandemic,
these ‘city-hubs’. This ‘hub-effect’ typically translates into but offer high earnings upside as beneficiaries of global
greater upswings in bank credit and property demand. The reflation, US stimulus and reopening, in our view.
banking and financial sector should benefit from a
combination of steepening yield curves, stronger credit
growth and the final stages of banks’ COVID-19 provisioning.
Twin-cities reflation based on recovery in financials and property
Economic activity index (z-score)
4
2
0
-2
-4
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Singapore
HongKong
Source: CEIC, UBS, as of May 2021
18 Investing in Asia Pacific June 2021Commodity-linked FX: Firmer economic
activity will likely drive up prices of commodities
like crude oil and industrial metals. This is a
tailwind for the AUD and the MYR. Hence, we “ We advise a
advise a selective approach toward such APAC commodity- selective
linked currencies.
approach where
higher oil and
Cyclical FX: The CNY offers one of the best risk-
reward profiles in the region, offering solid GDP
industrial metals
growth, an elevated yield, and strong current prices are a
account dynamics, with an expected 6-month tailwind for
total return of 4% (1.5% spot, 2.5% p.a. yield carry) and
5% annualized volatility. We also recommend exposure to currencies like
select cyclical currencies such as the KRW, the SGD, and the AUD.”
the THB. These currencies are trading at attractive entry
levels and should rebound meaningfully in the coming
months amid a global growth upswing.
Positioning for synchronized global growth – Long AUDUSD
In index terms
550 1.0
500 0.9
450 0.8
400 0.7
350 0.6
300 0.5
2014 2015 2016 2017 2018 2019 2020 2021
CRB Commodity Index (lhs)
AUDUSD (rhs)
Source: Bloomberg, UBS, as of 15 April 2021
Investing in Asia Pacific June 2021 19Asset class preferences
As of 21 May 2021
Least preferred Neutral Most preferred
Liquidity
Global equities
Equities total
United States
Eurozone
Switzerland
Emerging markets
Japan
United Kingdom
Asian equities
Asia ex-Japan equities
China
Hong Kong
India
Indonesia
South Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
Bonds
Bonds total
High grade bonds
High yield bonds
Investment grade bonds
Emerging market bonds
Asian investment grade bonds (USD)
Asian high yield bonds (USD)
Chinese government bonds
Commodities
Commodities total
Oil
Gold
Foreign exchange
USD
EUR
JPY
GBP
CHF
Note: These preferences are designed for a global investor who can hedge foreign currency fluctuations. For models that are tailored to US investors, please see UBS House View:
Investment Strategy Guide.
Source: UBS
20 Investing in Asia Pacific June 2021UBS APAC forecasts
APAC economic forecasts
% change y/y
GDP CPI
2019 2020 2021E 2022E 2019 2020 2021E 2022E
Australia 1.9 –2.4 5.0 3.3 1.6 0.8 2.3 1.8
New Zealand 2.4 –2.9 3.7 4.6 1.6 1.7 2.0 1.6
China 6.0 2.3 9.0 6.2 2.9 2.5 1.7 2.4
Vietnam 7.0 2.9 6.6 7.3 2.8 3.2 2.4 3.9
Indonesia 5.0 –2.1 5.0 6.8 2.8 2.0 2.2 3.3
Malaysia 4.3 –5.6 5.4 6.0 0.7 –1.1 2.5 1.9
Philippines 6.1 –9.6 6.0 9.0 2.5 2.6 4.3 3.2
Thailand 2.3 –6.1 2.5 6.0 0.7 –0.8 1.2 1.4
South Korea 2.0 –1.0 4.8 3.5 0.4 0.5 1.9 1.5
Taiwan 3.0 3.1 5.9 3.3 0.6 –0.2 1.4 1.0
India 4.0 –7.0 10.0 7.5 4.8 6.2 5.0 4.5
Singapore 1.3 –5.4 7.0 6.0 0.6 –0.2 1.4 1.0
Hong Kong –1.2 –6.1 5.3 5.2 2.9 0.3 1.7 1.7
Japan 0.3 –4.9 3.4 3.1 0.5 0.0 0.1 0.7
Asia ex-Japan 5.0 –0.8 8.2 6.4 2.9 2.8 2.4 2.8
APAC 4.4 –1.2 7.6 6.0 2.6 2.5 2.2 2.6
Source: UBS, as of 19 May 2021
Investing in Asia Pacific June 2021 21UBS APAC forecasts
APAC currencies versus the USD
We expect APAC currencies to top out against the USD later this year
20-May-21 Sep-21 Dec-21 Mar-22 Jun-22
USDCNY 6.44 6.30 6.35 6.40 6.45
USDHKD 7.76 7.80 7.80 7.80 7.80
USDIDR 14375 14400 14500 14600 14700
USDINR 73.2 74.0 75.0 76.0 77.0
USDKRW 1132 1080 1090 1100 1100
USDMYR 4.14 4.00 4.00 4.00 4.00
USDPHP 47.9 47.0 47.5 48.0 48.5
USDSGD 1.33 1.30 1.31 1.31 1.31
USDTHB 31.4 30.5 30.5 30.0 29.5
USDTWD 28.0 27.4 27.2 27.0 26.8
USDJPY 109 112 113 114 115
AUDUSD 0.78 0.82 0.81 0.80 0.80
NZDUSD 0.72 0.75 0.74 0.73 0.73
Source: Bloomberg, UBS, as of 20 May 2021
22 Investing in Asia Pacific June 2021UBS Chief Investment Office's ("CIO") investment views are prepared and published by the Global Wealth Management business of UBS
Switzerland AG (regulated by FINMA in Switzerland) or its affiliates ("UBS").
The investment views have been prepared in accordance with legal requirements designed to promote the independence of investment
research.
Generic investment research – Risk information:
This publication is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other
specific product. The analysis contained herein does not constitute a personal recommendation or take into account the particular investment
objectives, investment strategies, financial situation and needs of any specific recipient. It is based on numerous assumptions. Different
assumptions could result in materially different results. Certain services and products are subject to legal restrictions and cannot be offered
worldwide on an unrestricted basis and/or may not be eligible for sale to all investors. All information and opinions expressed in this document
were obtained from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to its
accuracy or completeness (other than disclosures relating to UBS). All information and opinions as well as any forecasts, estimates and market
prices indicated are current as of the date of this report, and are subject to change without notice. Opinions expressed herein may differ or be
contrary to those expressed by other business areas or divisions of UBS as a result of using different assumptions and/or criteria.
In no circumstances may this document or any of the information (including any forecast, value, index or other calculated amount ("Values")) be
used for any of the following purposes (i) valuation or accounting purposes; (ii) to determine the amounts due or payable, the price or the value
of any financial instrument or financial contract; or (iii) to measure the performance of any financial instrument including, without limitation, for
the purpose of tracking the return or performance of any Value or of defining the asset allocation of portfolio or of computing performance fees.
By receiving this document and the information you will be deemed to represent and warrant to UBS that you will not use this document or
otherwise rely on any of the information for any of the above purposes. UBS and any of its directors or employees may be entitled at any time to
hold long or short positions in investment instruments referred to herein, carry out transactions involving relevant investment instruments in the
capacity of principal or agent, or provide any other services or have officers, who serve as directors, either to/for the issuer, the investment
instrument itself or to/for any company commercially or financially affiliated to such issuers. At any time, investment decisions (including whether
to buy, sell or hold securities) made by UBS and its employees may differ from or be contrary to the opinions expressed in UBS research
publications. Some investments may not be readily realizable since the market in the securities is illiquid and therefore valuing the investment and
identifying the risk to which you are exposed may be difficult to quantify. UBS relies on information barriers to control the flow of information
contained in one or more areas within UBS, into other areas, units, divisions or affiliates of UBS. Futures and options trading is not suitable for
every investor as there is a substantial risk of loss, and losses in excess of an initial investment may occur. Past performance of an investment is no
guarantee for its future performance. Additional information will be made available upon request. Some investments may be subject to sudden
and large falls in value and on realization you may receive back less than you invested or may be required to pay more. Changes in foreign
exchange rates may have an adverse effect on the price, value or income of an investment. The analyst(s) responsible for the preparation of this
report may interact with trading desk personnel, sales personnel and other constituencies for the purpose of gathering, synthesizing and
interpreting market information.
Tax treatment depends on the individual circumstances and may be subject to change in the future. UBS does not provide legal or tax advice and
makes no representations as to the tax treatment of assets or the investment returns thereon both in general or with reference to specific client's
circumstances and needs. We are of necessity unable to take into account the particular investment objectives, financial situation and needs of
our individual clients and we would recommend that you take financial and/or tax advice as to the implications (including tax) of investing in any
of the products mentioned herein.
This material may not be reproduced or copies circulated without prior authority of UBS. Unless otherwise agreed in writing UBS expressly
prohibits the distribution and transfer of this material to third parties for any reason. UBS accepts no liability whatsoever for any claims or
lawsuits from any third parties arising from the use or distribution of this material. This report is for distribution only under such circumstances as
may be permitted by applicable law. For information on the ways in which CIO manages conflicts and maintains independence of its investment
views and publication offering, and research and rating methodologies, please visit www.ubs.com/research. Additional information on the
relevant authors of this publication and other CIO publication(s) referenced in this report; and copies of any past reports on this topic; are
available upon request from your client advisor.
Options and futures are not suitable for all investors, and trading in these instruments is considered risky and may be appropriate only for
sophisticated investors. Prior to buying or selling an option, and for the complete risks relating to options, you must receive a copy of "Characteristics
and Risks of Standardized Options". You may read the document at https://www.theocc.com/about/publications/character-risks.jsp or ask your
financial advisor for a copy.
Investing in structured investments involves significant risks. For a detailed discussion of the risks involved in investing in any particular structured
investment, you must read the relevant offering materials for that investment. Structured investments are unsecured obligations of a particular
issuer with returns linked to the performance of an underlying asset. Depending on the terms of the investment, investors could lose all or a
substantial portion of their investment based on the performance of the underlying asset. Investors could also lose their entire investment if the
issuer becomes insolvent. UBS Financial Services Inc. does not guarantee in any way the obligations or the financial condition of any issuer or the
accuracy of any financial information provided by any issuer. Structured investments are not traditional investments and investing in a structured
investment is not equivalent to investing directly in the underlying asset. Structured investments may have limited or no liquidity, and investors
should be prepared to hold their investment to maturity. The return of structured investments may be limited by a maximum gain, participation
Investing in Asia Pacific June 2021 23rate or other feature. Structured investments may include call features and, if a structured investment is called early, investors would not earn any further return and may not be able to reinvest in similar investments with similar terms. Structured investments include costs and fees which are generally embedded in the price of the investment. The tax treatment of a structured investment may be complex and may differ from a direct investment in the underlying asset. UBS Financial Services Inc. and its employees do not provide tax advice. Investors should consult their own tax advisor about their own tax situation before investing in any securities. Important Information About Sustainable Investing Strategies: Sustainable investing strategies aim to consider and incorporate environmental, social and governance (ESG) factors into investment process and portfolio construction. 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 sustainable investments may be lower or higher than portfolios where ESG factors, exclusions, or other sustainability issues are not considered by the portfolio manager, and the investment opportunities available to such portfolios may differ. 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. External Asset Managers / External Financial Consultants: In case this research or publication is provided to an External Asset Manager or an External Financial Consultant, UBS expressly prohibits that it is redistributed by the External Asset Manager or the External Financial Consultant and is made available to their clients and/or third parties. USA: Distributed to US persons by UBS Financial Services Inc., UBS Securities LLC or UBS Swiss Financial Advisers AG, subsidiaries of UBS AG. UBS Switzerland AG, UBS Europe SE, UBS Bank, S.A., UBS Brasil Administradora de Valores Mobiliarios Ltda, UBS Asesores Mexico, S.A. de C.V., UBS Securities Japan Co., Ltd, UBS Wealth Management Israel Ltd and UBS Menkul Degerler AS are affiliates of UBS AG. UBS Financial Services Incorporated of Puerto Rico is a subsidiary of UBS Financial Services Inc. UBS Financial Services Inc. accepts responsibility for the content of a report prepared by a non-US affiliate when it distributes reports to US persons. All transactions by a US person in the securities mentioned in this report should be effected through a US-registered broker dealer affiliated with UBS, and not through a non-US affiliate. The contents of this report have not been and will not be approved by any securities or investment authority in the United States or elsewhere. UBS Financial Services Inc. is not acting as a municipal advisor to any municipal entity or obligated person within the meaning of Section 15B of the Securities Exchange Act (the "Municipal Advisor Rule") and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of the Municipal Advisor Rule. For country information, please visit ubs.com/cio-country-disclaimer-gr or ask your client advisor for the full disclaimer. Version C/2020. CIO82652744 UBS 2021. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved. 24 Investing in Asia Pacific June 2021
You can also read
