Investing in Asia Pacific - Look beyond the uncertainty - UBS
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A monthly guide to investing in Asia Pacific financial markets
Investing in Asia Pacific
May 2021
Chief Investment Office GWM
Investment Research
Look beyond
the uncertainty
Investing in Asia Pacific This report has been prepared by UBS AG Singapore Branch, UBS AG Hong Kong Branch, UBS Securities Japan Co., Ltd., UBS Switzerland AG, UBS AG London Branch and UBS Financial Services Inc. Editor-in-chief Wayne Gordon Editorial deadline Product management 23 April 2021 Rajesh Donthula* Languages Sita Chavali Published in English, Chinese (Traditional and Simplified) Investment writer Translations Aaron Kreuscher Rachel Lee Editors Bianhua Gao Aaron Kreuscher Danjun Zheng Murugesan Suppayyan Contact Desktop publishing ubs.com/cio Pavan Mekala* Cover picture * An employee of Cognizant Group. Gettyimages Cognizant staff provides support services to UBS. 2 Investing in Asia Pacific May 2021
Contents
05 Editorial
08 Asia monthly outlook
Look beyond the uncertainty
12 Tactical views
13 Asset allocation
14 Equities
15 Japanese equities
16 Bonds
17 Currencies
18 Commodities
19 Investment spotlight
Future of Earth
21 Asset class preferences
22 UBS APAC forecasts
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.
Investing in Asia Pacific May 2021 3
4 Investing in Asia Pacific May 2021
Editorial
The global economy is healing fast, and expectations for growth and earnings are
on the rise. But risk assets in Asia, weighed down by resurgences in virus cases and
re-introduced mobility restrictions, haven’t tracked higher.
The good news is that vaccination progress is speeding up, with governments in
the hardest-hit regions accelerating their rollouts. This gives us confidence in our
robust projections for regional economic growth (8%–9% rate forecast) and Asia
ex-Japan earnings (almost 28% growth expected) this year. China’s first-quarter
output is particularly reassuring, as are signs that demand for services and
transportation are strengthening.
Mark Haefele
Meanwhile, China’s equity market is grappling with the regulatory headwinds Chief Investment Officer
Global Wealth Management
facing its internet and education sector. But here, too, we see some relief now
that there is greater certainty that the potential impact should be manageable. So,
although we have lowered our earnings forecasts for these sectors and remain
watchful, in our base case we still see robust growth rates for this year and
beyond. Also, valuations have become attractive.
Hence, we stay risk-on overall and keep our preferences for China, India, and
Singapore. Our one change on the equity side for this month is raising Malaysia to
Neutral, as the market’s fundamentals are improving, and we expect it to catch-up
with the benchmark after underperforming it all year. Hong Kong and the
Philippines remain Least Preferred.
For fixed income, we prefer Asia high yield and shift investment grade to Least
Min Lan Tan
Preferred. High yield’s credit metrics are strengthening and should see spread
Head Chief Investment Office APAC
tightening, while investment grade is facing repricing following the credit scare Global Wealth Management
over Huarong. We continue to like Chinese government bonds for their yield and
diversification properties.
Our advice to investors is to be patient and look beyond the short-term
uncertainty, and to stay focused on regional beneficiaries of reopening, reflation, Follow us on
greentech spending, and US stimulus. Risks remain, but we think a broadening
recovery is likely just around the corner.
linkedin.com/in/markhaefele
linkedin.com/in/minlantan
twitter.com/UBS_CIO
Mark Haefele Min Lan Tan
Investing in Asia Pacific May 2021 5
Asset class views
Asset allocation
• Asia ex-Japan equities Most Preferred; looking for opportunities in
value/cyclical stocks.
• Asia investment grade credit shifted to Least Preferred.
• Malaysia upgraded to Neutral.
Equities
• Expect 27.7% earnings growth for Asia ex-Japan equities in 2021.
Korea and Singapore will likely be among the key markets with the
strongest earnings growth in 2021.
• Low-teens upside for Asia ex-Japan equities till end-2021. At a 33%
discount versus global equities (vs. LT average of 23%), relative valuations
are attractive.
• Diversify exposure between reflation beneficiaries and quality cyclicals.
Japanese equities
• Corporate earnings are recovering. We expect the
March 2021 quarter results to show y/y profit growth.
As the economy opens, earnings should continue
recovering until the September 2021 quarter.
• Focus on beneficiaries of reopening. While the
Nikkei 225 is trading at a 10-year high, we think
undervalued consumer product and manufacturing
names will start to catch up as the vaccine pace
accelerates.
Bonds
• Double whammy for IG: On top of broader interest rate volatility,
IG returns have been hurt by restructuring concerns regarding a
top-tier SOE in China. As a result, we expect IG spreads to widen
10–20bps in the short term.
• Still prefer HY: HY spreads continue to tighten, albeit slowly. At
current levels, they are around 30bps above their historical average
and offer 180bps of pick up over US HY.
Currencies
• APAC currencies recovering from late-March trough. With Fed
tapering largely priced in, a gradual and orderly rise in US yields in
the coming quarters should not weigh on APAC currencies.
• APAC currencies should resume appreciation in 2H as
investors refocus on the fundamental drivers underpinning
APAC currency appreciation: the recovery in global growth and
favorable balance-of-payment dynamics.
Commodities
• Cyclical sectors to outperform. We have shifted commodities to Most Preferred and believe the energy
and base metal sectors will likely perform the best.
• Gold shifted to Least Preferred. Higher US real rates and improving global growth should spark
further outflows from exchange traded funds in 2H.
6 Investing in Asia Pacific May 2021
How to invest
Equities
• Select reflation beneficiaries especially in financials, materials and industrials.
• Leaders in quality cyclical sectors, such as platform leaders in the internet space,
along with select cyclical tech industries like memory and semiconductor
equipment.
• Structural themes such as subscription champions in Asia, China Greentech, 5G
supply chain, China's digital economy, and ASEAN's new economy.
Japanese equities
• Japan’s normalization as the vaccination pace picks up.
• Recovery of value stocks in Japan.
• 5G is driving a digital shift in Japan.
Bonds
• In IG, we prefer India BBB up to 5–6 years and avoid
long duration single-A bonds.
• In HY China property, we avoid BB bonds below 4%.
and prefer bonds that have underperformed recently.
Currencies
• The CNY offers an attractive risk-reward profile—
moderate spot and yield carry returns with managed
volatility.
• Go long commodity-linked currencies (AUD, MYR) and
reopening beneficiaries (THB, SGD).
• The JPY is an attractive funding currency, as it tends to
underperform when global growth rebounds and as
safe-haven demand fades.
Commodities
• Long commodities.
• Long crude oil.
• Long base metals.
Investing in Asia Pacific May 2021 7
Asia monthly outlook Look beyond the uncertainty • Vaccines are allowing economies worldwide to restart, and a vibrant economic rebound is happening globally. • China’s leading tech names will likely stay volatile in the short term and their earnings may dip to a degree because of the regulatory changes. • Earnings upgrades are on the rise, while valuations have dropped amid interest rate volatility and rising virus cases. Adrian Zuercher, Head Global Asset Allocation; Philip Wyatt, Economist; Crystal Zhao, Strategist; Yifan Hu, Regional Chief Investment Officer & Chief China Economist; Kathy Li, Analyst; Valerie Chan, Analyst; Hartmut Issel, Head APAC Equity; Eva Lee, Head Hong Kong Equity; Hyde Chen, Analyst; Sundeep Gantori, Analyst; Stephanie Choi, Analyst; Timothy Tay, Head APAC Credit; Devinda Paranathanthri, Analyst; Dominic Schnider, Head Commodities and APAC FX; Teck Leng Tan, Analyst; Giovanni Staunovo, Analyst; Wayne Gordon, Analyst; 8 Investing in Asia Pacific May 2021
Risk sentiment in Asia has sagged as a result of COVID-19 Vaccines should soon pick up pace
resurgences in certain markets, a lagging pace of
vaccination compared to other regions, and heightened India is suffering from another wave of coronavirus cases.
regulatory risk in China. As such, MSCI Asia-ex Japan has The daily case count has topped 300,000, and hospitals
dropped 8 percentage points and underperformed the S&P are struggling with the influx of patients. The country has
500 by 13ppt since mid-February. re-enacted mobility restrictions to slow the spread. Other
countries in the region are also grappling with an increase
Yet the fundamental narrative remains the same: Vaccines in infections, such as Japan and the Philippines, and are
are allowing economies worldwide to restart, and a vibrant restricting movement.
economic rebound is happening globally. Moreover, the
risk of higher US interest rates and Chinese regulations And while most of Asia has started to administer vaccines,
appear mostly priced into asset prices, monetary policy achieving the target for mass immunity has been a slow
remains highly accommodative, and the US government is process. For now, Singapore (19% of people vaccinated
unleashing waves of fiscal stimulus on its economy. with at least one dose) is leading the region in terms of
vaccine progress. Mainland China and Hong Kong are next
The pandemic will remain a looming threat to financial at around 15% and 10%, respectively, while most others
markets all year, but thanks to the vaccine rollout, the in the region are below 5%.
world is turning a corner even though virus clusters are
delaying the recoveries in certain markets. So counter to However, the vaccination pace is set to quickly ramp up in
the usual seasonality (stocks have historically struggled the months ahead. Hiccups in some brands have led to
during the middle of year), we stay risk-on and advise delays, which should be straightened out in time. Supply is
investors to stick with their reopening and reflation trades. also increasing regionwide, with governments in hard-hit
Investors should also continue to invest sustainably, which regions like India’s aggressively moving up their vaccine
has proven to be a resilient strategy amid turbulent timelines. We therefore remain optimistic that virus cases
periods. and mobility restrictions will soon start ebbing, thus adding
fuel to the economic recovery in 2H.
Vaccination progress remains slow for most in Asia
Vaccinated (min. 1 dose) people per 100
60
48.8
50
40.2
40
30
23.3
19.9
20
China still leads the 14.6
region, with 1Q GDP 10
10.3
8.1
6.7
expanding by an 4.1 3.7 2.9
2.3 1.3 1.2
0.8 0.1 0.1
eye-popping 0
Mainland China
Vietnam
Singapore
Taiwan
India
Indonesia
Malaysia
United States
European Union
World
South Korea
New Zealand
Philippines
Hong Kong SAR
Japan
United Kingdom
Thailand
18% y/y.
Source: Our World in Data, CEIC, UBS, as of 21 April 2021
Investing in Asia Pacific May 2021 9Recovery happening despite virus rise Worst of regulatory headwinds has passed for
tech…
Economic activity revived quickly through 1Q21,
particularly in the IT-strong economies of Mainland China, Beijing’s regulatory drive targeting the country’s internet
Taiwan, Korea and Singapore. Tech orders and exports sector (as well as education) has weighed on the overall
growth remain very high, but there is emerging evidence equity market. The tech-heavy offshore MSCI China index
of a flattening out. Supply chain blockages have been a has fallen by 11% over the past two months,
problem, but as long as global orders remain solid and underperforming MSCI Asia ex-Japan by 6ppt, due mostly
inventories low, there should be upward pressure on to the regulatory risk (rising US yields have also played a
producer pricing. role). Meanwhile, the new-economy sector is down 20%–
25% since the peak in October.
We’re now approaching the peak in economic
momentum, with Asia ex-Japan real GDP set to exceed But there is light at the end of the tunnel. The fine on
20% y/y in 2Q. China still leads the region, with 1Q GDP Alibaba—although a record high—is manageable for the
expanding by an eye-popping 18% y/y. We expect it to company (represents just 4% of 2019 revenue) and
ease from here at the headline level alongside trade, but demonstrates that Beijing seeks change and not disruption,
stronger services consumption, staggered re-opening of in our view. It also gives a glimpse into what other firms
external travel and still significant—albeit more under the regulatory microscope can expect in terms of
moderate—policy support is supportive for the region. penalty amount and restructuring changes. Anti-monopoly
We continue to expect Asia ex-Japan to grow by 8%–9% investigations will continue, but as per the above example,
this year. any related charges should be manageable for the
individual firms.
The re-opening of economies should most benefit those
more reliant on travel (Singapore, Thailand) and those China’s leading tech names will likely stay volatile in the
driven by domestic services demand (China, India, short term and their earnings may dip to a degree because
Indonesia). Meanwhile, we expect APAC inflation to of the regulatory changes. But with some uncertainty
bounce in 2Q led by services, but still see consumer prices cleared, we think investors will return focus to tech’s
up by 2.5% on average across Asia and producer prices strong fundamentals. Hence, we remain positive on the
growing by mid-single digits. Finally, even with the sector and continue to forecast above-average, double-
prospective lift in inflation, we do not expect any policy digit earnings growth rates over the medium to long term.
rate hikes this year in Asia and think policy in China will
remain supportive alongside greater debt discipline.
… but not for LGFVs
Huarong’s recent debt issue has heighted market concerns
over Beijing’s stance for state-owned enterprise (SOE)
financing support. While the recent headlines relating to
this case suggest that government support is possible, the
market has learned that it may not be so straight forward.
This event is likely to lead to further differentiation among
SOE bond issuers, in our view. The SOE space in general is
likely to carry a premium until the asset manager’s case is
resolved in an orderly fashion.
There will also be an increased focus on local government
financing vehicles (LGFVs) again as the State Council clearly
“ Asia HY offers 7.1% indicated in a statement that local governments shouldn’t
yield, and we expect rely on them to increase off-balance-sheet debt. More
further spread importantly, policymakers suggested that LGFVs should
offload their government financing function and
tightening by the end of implement bankruptcy proceedings or liquidation if they
2021 as credit metrics can’t repay their borrowing.
improve.”
10 Investing in Asia Pacific May 2021Where to invest
As a result of the credit issues in China, we have
Value started to outperform growth since last
downgraded Asia investment grade (IG) to Least Preferred
from Neutral this month. The noted event has changed the
November
market perception of government endorsement, triggering Total return index
the repricing of bonds from weak SOEs and LGFVs in the 145
IG space. Higher US Treasury yields should also cap total
140
returns for IG.
135
In contrast, we still like Asia high yield (HY, in USD) and
onshore China government bonds (CGBs, in CNY). Asia HY 130
offers 7.1% yield, and we expect further spread tightening
125
by the end of 2021 as credit metrics improve. Meanwhile,
CGBs are a good diversifier to G3 risk-free bonds and 120
should benefit from expected CNY appreciation against the
115
USD in the months ahead—USDCNY is forecast to be 6.35
in 2H. 110
In the equity space, we remain positive on the region 105
overall. Earnings upgrades are on the rise, while valuations
100
have dropped amid interest rate volatility and rising virus Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21
cases. Meanwhile, we see some support for local clean
energy industries from Biden’s infrastructure plan and US World growth/value
fiscal support. Our guidance is to stay positioned for Asia growth/value
reopening and reflation through value and cyclical stocks in
Source: Thomson Reuters, Datastream, UBS, as of 13 April 2021
Asia.
Our industry preferences are for select capital goods,
construction materials, consumer services, transportation,
banks, and metals & mining. Our markets of choice are still Investors can also consider commodities like crude oil and
for China, India and Singapore. Singapore is likely to copper, which we think will benefit the most from the
continue to benefit from the value rotation and upward acceleration of global growth. Commodities as an asset
projections for US yields, while regulatory headwinds class are Most Preferred—and gold is Least Preferred—for
should abate in China and lead share prices higher. The the same reason. Likewise, we like currencies with links to
sharp rise of COVID-19 cases in India could push out the commodity/cyclical upturn or reopening like the AUD,
growth prospects, but we remain positive on its MYR and THB.
consumption recovery and earnings rebound once the dust
settles. We have upgraded Malaysia to Neutral this month Volatility is going to remain a fixture for some time. Virus
given its steep underperformance versus the benchmark cases will ebb and flow, while more vaccine setbacks
this year and in view of fundamental improvements. appear likely. Nonetheless, the world is now on the path to
recovery from the pandemic. Investors should look through
the near-term uncertainties, but be prepared for COVID-
driven volatility spikes.
Investing in Asia Pacific May 2021 11Tactical views Asset allocation Equities Japanese equities Bonds Currencies Commodities 12 Investing in Asia Pacific May 2021
Tactical view
Asset allocation
Adrian Zuercher, Head Global Asset Allocation
Crystal Zhao, Strategist
Current positions and changes
Asia ex-Japan equities Most Preferred; looking
for value/cyclical opportunities
Downgrade Asia investment grade to Least
Preferred this month
Upgrade Malaysia to Neutral this month
Asia investment thesis
• We remain positive on Asian equities. Forward EPS
continues to be upgraded, while valuations have dropped
amid interest rate volatility and rising virus cases in certain
markets. The growth impact from new COVID-19 clusters
is manageable, in our view, as the region is speeding up
its vaccination rollout. We advise positioning for reopening
and reflation through value and cyclical stocks in Asia,
with an industry focus on capital goods, construction
materials, consumer services, transportation, banks, and
metals & mining.
• Malaysia upgraded to Neutral; Singapore, China and
India remain Most Preferred. Malaysia's fundamentals are
improving, and we expect the market to catch up with the
regional benchmark after six months of underperformance. Earnings recovery supports our preference for AxJ
Singapore is the second best-performing market in Asia year-
equity
to-date thanks to its value characteristics. Mainland China is
still facing anti-trust headwinds, but the fine on Alibaba 2,400 55
suggests a manageable outcome. India is suffering from
50
record new COVID-19 cases, but with the government 2,000
working to accelerate vaccinations, we think the recent 45
correction offers a good entry point. Hong Kong and the
Philippines are Least Preferred. 1,600
40
• Asia IG downgraded to Least Preferred; still like Asia
35
HY (USD) and CGBs (CNY). The Huarong event has 1,200
changed the market perception of government 30
endorsement, triggering the repricing of bonds from weak 800
SOEs and LGFVs in the IG space. Higher US Treasury yields 25
should also cap total returns for IG. In contrast, Asia HY
offers 7.1% yield, and the IG space’s woes shouldn’t spill 400 20
2008 2010 2012 2014 2016 2018 2020
into the HY segment. We expect further spread tightening in
Asia HY by the end of 2021 as credit metrics improve. MSCI AxJ total return index (LHS)
Separately, Chinese government bonds are a good diversifier 12m trailing EPS (in USD, RHS)
to G3 risk-free bonds and should benefit from expected
Source: Datastream, UBS, as of April 2021
CNY appreciation against the USD in the months ahead.
Investing in Asia Pacific May 2021 13Tactical view
Asia ex-Japan equities
Sundeep Gantori, Analyst
Delwin Kurnia Limas, Analyst
Key trends
• Expect 27.7% earnings growth for Asia ex-Japan
equities in 2021. Korea and Singapore will likely be Related reports
among the key markets with strongest earnings growth • Position for Asia reopening & reflation,
in 2021. Following a positive 1Q memory ASP trend, we 15 April 2021
expect further low to mid-teens upside in sequential • Opportunities in China greentech update,
pricing in 2Q, driving a robust cyclical margin 22 March 2021
improvement in Korea’s memory industry. Meanwhile, • Investing in digital subscriptions, 10 March 2021
Singapore remains well placed to benefit from the global Some reports may not be available for US clients.
reflationary backdrop, in our view.
• Low-teens upside in Asia ex-Japan equities till end-
2021. With still attractive relative valuations (a 33%
discount versus global equities, below the long-term
average of a 23% discount), mid-teens top-line growth
and 140bps margin expansion, we expect low-teens
upside for the region till end-2021.
• Diversified exposure between reflation beneficiaries
and quality cyclicals preferred. In the near term, we
expect sectors such as financials, materials, and industrials Solid top-line growth and margin improvement to
to benefit from the reflationary backdrop in the region. In
drive 27.7% earnings growth in 2021
the medium term, we continue to favor reasonably priced
MSCI Asia ex-Japan sales growth (LHS, in % y/y) and margin expansion (RHS, in bps)
internet and technology names with robust earnings
growth potential. 16% 150
15% 140
Key investment ideas 14% 130
13%
120
Select reflation beneficiaries. We see tactical 12%
upside in select names in financials, materials and 110
11%
industrials given the ongoing global economic 100
10%
recovery and still relatively attractive valuations. 90
9%
80
Leaders in quality cyclical sectors. We remain 8%
constructive on reasonably priced platform leaders in 7% 70
the internet space, along with select cyclical tech 6% 60
industries like memory and semiconductor
5% 50
equipment. 2017 2021
Revenue (% y/y, LHS)
Structural themes such as subscription champions Operating margin expansion (bps, RHS)
in Asia, China greentech, 5G supply chain, China's
Source: Bloomberg, Factset, UBS, as of April 2021
digital economy, and ASEAN's new economy.
14 Investing in Asia Pacific May 2021Tactical 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 US 10-year yield is around 1.7%,
the Japanese counterpart has stayed near zero after the Related reports
BoJ made minor changes to its monetary policy stance. • Accelerating vaccination is key to Japan’s
The Japanese yen has been one of the weakest currencies normalization, 16 April 2021
against the US dollar for the past six months. This is • Sector rotation key for 2021, 2 March 2021
positive for Japanese exporters Some reports may not be available for US clients.
• Corporate earnings are recovering. We expect the
March 2021 quarter results to show profit growth year-
on-year. As the economy opens up, earnings should
continue recovering until the September 2021 quarter.
• Valuations matter. The Nikkei 225 is trading at 21x its
12-month forward EPS—a 10-year high. The high-tech
sector’s strong outperformance has driven the market’s Japanese equities priced in further earnings
P/E multiple expansion. But since vaccinations have begun, recovery, in our view. Investors should be selective
we think undervalued sectors will start to catch up. despite solid earnings growth
1,800 32,000
Key investment ideas
30,000
1,600
5G is driving a digital shift in Japan. Prime Minister 28,000
Suga strongly supports a 5G-driven digital shift in 1,400 26,000
Japan. We like companies that are leading this
24,000
transition. 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. 16,000
600 14,000
More digital investment needed. The Suga
Apr-18
Apr-19
Apr-20
Apr-21
Jul-18
Jul-19
Jul-20
Jan-18
Jan-19
Jan-20
Jan-21
Oct-19
Oct-18
Oct-20
administration is setting up a new government
organization to assist in digital transformation (DX) Nikkei225 12-month fwd EPS (LHS)
among Japanese corporations and consumers. We Nikkie225 (RHS)
expect greater support for related programs,
Source: Bloomberg, UBS, as of 9 April 2021
benefitting the companies involved.
Investing in Asia Pacific May 2021 15Tactical view
Bonds
Timothy Tay, Head APAC Credit
Devinda Paranathanthri, Analyst
Key trends
• Double whammy for IG: On top of interest rate
volatility, IG returns have been hurt by restructuring Related reports
concerns regarding a top-tier SOE in China. Until it’s • China Huarong Asset Management: Restoring
resolved, we believe this issue could impact the entire confidence, 19 April 2021
China IG space. As a result, we expect IG spreads to • China property: Play it safe, 16 April 2021
widen 10–20bps in the short term and forecast returns • China property: Rebalance amid policy headwinds,
of zero to –1% over the next six months. 9 March 2021
Some reports may not be available for US clients.
• Still prefer HY. HY spreads continue to tighten, albeit
slowly. At current levels, they are around 30bps above
their historical average and offer 180bps of pick up over
US HY. These valuations still look reasonable to us.
Reflation beneficiaries, such as commodity-linked names,
should drive performance in the coming month, in our Valuations for Asia HY still look decent vs. other
view. We continue to believe HY will outperform IG in regions
the next few months. Asia HY offer around 180bp spread pick-up over US HY, spreads (bps)
1,200
• Stable results from China property. Recently
concluded results from the China property sector show
1,000
credit metrics improved in 2020. Rating actions
following the results were mostly positive. But given
800
policy tightening and the negative news about select
SOEs, we have turned selective on our bottom-up bond
picks. 600
Key investment ideas 400
China property. We see value in select shorter- 200
dated single B bonds that have oversold recently.
0
Be selective in IG: We suggest moving to segments Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 Sep-20
that will likely be affected less by rate moves, such as Asia HY EM HY
India BBB and perpetuals with good structures, and US HY
out of long-duration single A bonds and Indonesia
Source: PBoC, CEIC, UBS, as of April 2021
BBB bonds.
16 Investing in Asia Pacific May 2021Tactical view
Currencies
Dominic Schnider, Head Commodities and APAC FX
Teck Leng Tan, Analyst
Wayne Gordon, Analyst
Key trends
• APAC currencies recovering from late-March
trough. We see limited USD upside from here. First, Related reports
current market expectations for Fed rate hikes look too • APAC currencies: Regaining ground versus the
aggressive. Second, a recovery in the EUR should keep a greenback, 20 April 2021
lid on USD strength. Third, the market has significantly • AUDUSD: Go Long, 31 March 2021
trimmed short-USD positioning, which lessens the risk of
further short-covering.
• APAC currencies should resume appreciation in 2H.
With Fed tapering largely priced in, a gradual and orderly
rise in US yields in the coming quarters should not weigh
on APAC currencies. We expect markets to refocus on
the fundamental drivers underpinning APAC currency
appreciation: global growth recovery and favorable APAC currencies' 12-month return expectations
balance-of-payment dynamics. versus the USD
Based on our end-March 2022 forecasts
Key investment ideas 10%
8%
CNY offers attractive risk-reward. The CNY is
among the best performers year-to-date versus the 6%
USD (flat, vs. –2% on average for APAC currencies).
4%
We maintain our preference for the CNY for spot
appreciation (USDCNY forecast at 6.35 by 2H21) and 2%
its 2.5% p.a. yield carry versus the USD.
0%
We like commodity-linked currencies (AUD, -2%
MYR) and re-opening beneficiaries (THB, SGD).
-4%
Higher commodity prices should lift the AUD and
MYR, while gradual resumption of global tourism -6%
flows should support the THB and SGD.
MYR
AUD
JPY
INR
IDR
CNY
THB
KRW
PHP
NZD
TWD
Average
SGD
JPY is still an attractive funding currency. We Expected 12M spot return vs USD 12M yield carry vs USD
expect USDJPY to trade at 112 by end-2021, as Expected 12M total return
recovering global growth and market risk sentiment
Source: Bloomberg, UBS, as of 20 April 2021
dampens the yen’s safe-haven appeal.
Investing in Asia Pacific May 2021 17Tactical view
Commodities
Dominic Schnider, Head Commodities and APAC FX
Giovanni Staunovo, Analyst
Wayne Gordon, Analyst
Key trends
• Positive outlook. The most important narrative for
higher commodity prices remains intact: global economic Related reports
growth and a broader reopening should accelerate as • Gold: Time to consider your options,
the vaccination rollout gathers pace. We believe the 13 April 2021
expected improvements ahead and ongoing weather • Commodities: Stick with cyclical sectors,
risks are not fully priced into cyclical and soft 5 April 2021
commodities, respectively. • Base metals: A pause only, and not a trend
reversal, 22 March 2021
• Cyclical sectors to outperform. We have shifted
commodities to Most Preferred and believe the energy
and base metal sectors will perform the best. We see
some residual price strength in agriculture and think
livestock prices should stabilize. On the other hand, gold
prices should pull back.
• Gold shifted to Least Preferred. We expect gold prices
to fall to USD 1,600/oz by end-2021. Despite broad USD
weakness, higher US real rates and improving global
growth should spark further outflows from ETFs in 2H.
Individual strategic weights should be maintained given
gold's diversification properties, but we advise protecting
against further downside in prices. Strong rebound in US gasoline demand benefiting
from fast vaccination pace in the US
Key investment ideas Values are in million barrels per day
10.0
Crude oil: With the vaccine rollout gaining pace
9.5
over the coming months and mobility restrictions
being eased, the oil demand recovery should 9.0
continue during 2Q21. OPEC and its allies' (OPEC+) 8.5
cautious approach in bringing back oil production
8.0
they cut last year should add price support. With an
undersupplied oil market, we expect Brent to rise to 7.5
USD 75/bbl in 2H21. 7.0
6.5
Base metals: We reiterate our bullish view. First, the
top-down macroeconomic outlook remains 6.0
conducive for stronger metal demand. Second, 5.5
structural demand drivers for copper and nickel
5.0
linked to de-carbonization efforts remain firmly in Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
place. Lastly, we think environmental concerns may 2019 2020
constrain supply additions across the sector, mainly 2021
in the case of aluminum, and add to the pricing
Source: EIA, UBS, as of April 2021
power of aluminum smelters.
18 Investing in Asia Pacific May 2021Investment spotlight
Future of Earth
Throughout history, human ingenuity has prevailed in the face of numerous
challenges. One recent example is the rapid development of the COVID-19
vaccine. Looking to the future, one of the biggest hurdles we face is what
economists have called the “environmental credit crunch.” Our current standard
of living and overall level of consumption are unsustainable in relation to our
planet’s finite natural resources. As global citizens, consumers, and investors, we
are stewards of the Earth. We have the power to shape a more sustainable path
that will allow us to continue to evolve our quality of life while preserving our
planet for the next generation. The “Future of Earth” rests with us.
Brennan Azevedo; Carl Berrisford; Stephanie Choi; Alejo Czerwonko; Nicole Decker; James Dobson; Wayne Gordon; Hartmut Issel;
Laura Kane; Michelle Laliberte; Rudolf Leeman; Amantia Muhedini; Antonia Sariyska; Adam Scheiner; Carsten Schlufter;
Giovanni Staunovo; Alexander Stiehler; Lachlan Towart
Urgent action is needed to combat the growing climate Investment takeaways
crisis. From extreme weather to unsafe air quality, the A range of sustainable and thematic investment strategies
environmental and human toll of climate change has can help investors integrate these corporate-level
become apparent. Natural disasters caused an economic considerations into their portfolio. Thematic investments
loss of USD 268 billion globally in 2020, according to Aon.1 typically target companies with revenue exposure to unique
In the US alone, 22 natural disaster events took a financial or innovative products and services, while sustainable
toll of more than USD 1 billion each, a new annual record investment strategies consider company operations
and double the number recorded in 2019.2 alongside a number of environmental, social, and
governance factors. Notably, thematic and sustainable
A coordinated effort between the public and private investments often overlap, and many strategies will
sectors will be critical to solving the challenges ahead. For consider both of these factors in their investment analysis.
investors, the transition to a more sustainable future
presents both risks and opportunities. While climate
change is a rising source of uncertainty in assessing asset
values, more companies are endeavoring to reduce their
environmental footprint and be better positioned for the
future. Those that are innovating to solve climate-related
challenges will enjoy robust long-term growth prospects.
1 Aon Impact Forecasting, “Weather, Climate & Catastrophe Insight: 2020
Annual Report,” https://www.aon.com/global-weather-catastrophe-
natural-disasters-costs-climate-change-2020-annual-report/index.html
2 NOAA National Centers for Environmental Information 2021, “Billion-Dollar
Weather and Climate Disasters,” https://www.ncdc.noaa.gov/billions/
Investing in Asia Pacific May 2021 19People, health, and Energy Land Water
communities
Air pollution is the fourth Energy-related emissions account Sustainable land use is key to Water is abundant on a global
most common cause of death for over two-thirds of global meeting climate targets. In its scale. Seventy-one percent of the
globally. It leads to greenhouse gas emissions, landmark Global Assessment Earth is covered by water;
respiratory and cardiovascular highlighting the need to end our Report on Biodiversity and however, only 2.5% of the
disease and is linked to reliance on fossil fuels. A Ecosystem Services, the UN world’s water is freshwater, and
certain forms of cancer. complete decarbonization and estimates that 75% of the of this, 69% is locked in glaciers
Other effects of climate transition to clean fuels is an earth’s surface has been or frozen ice caps.3 Despite this
change on human health enormous task. History has severely altered by human inflexible supply, demand is
include extreme heat in larger shown that scaling up supplies actions, while the IPCC constantly growing. Since the
cities and the potential for of any energy resource takes estimates that about 21–37% beginning of the 20th century,
wider spread of infectious decades, and this is why it is of total emissions are from 1900 to 2010, global water
disease by insects as important to begin the process attributable to the food system. withdrawal increased 7.3 times,
temperatures rise. now. whereas the world population
Tackling environmental issues grew 4.4 times.4
Climate change not only The good news is that the pace and biodiversity loss is a huge
impacts human health and of the transition appears brisk. and complex task. To reduce Long-term developments such as
mortality; it also influences We expect the market share for environmental harm and a growing population, rising
the sustainability of our renewables to rise rapidly at the systemic risks, we need to living standards, industrialization
communities. These adverse expense of coal and oil, the two rethink how we produce and in emerging markets, and a lack
effects are disproportionately largest energy sources. Still, fossil consume the food we eat of infrastructure heavily affect
felt in parts of the emerging fuels may retain a major role for and the clothes we wear, water supply and demand.
world, leading to decades, given their widespread their respective supply chains, Climate change is another vital
displacement of low-income use. and how we live. We need to factor influencing the global
populations, and, in the most enhance sustainable supply water supply in terms of quality,
extreme cases, have put Scalable and affordable clean chains and trade. quantity, and timing. The UN
some areas at risk of energy technologies in estimates that 2.2 billion people
becoming uninhabitable. transportation fuels and for The good news is that lack safely managed drinking
Beyond the human toll, there industrial use are under investors and governments water, and nearly 700 million
is a large economic cost development, but many remain alike are awakening to the could be displaced by 2030 due
associated with these trends. immature. For now, ensuring risks involved in land to water scarcity.
energy security requires a mismanagement and the
diversified, “all of the above” accelerating destruction of
strategy to achieve a successful nature, as well as the
transition to a clean energy opportunities to invest in
future. conservation and land
management solutions.
Where to invest
• Treatments for illnesses • Electric transport, fuel cells, • Land use monitoring and • Smart water networks, water
linked to climate change, batteries and alternative fuels supply chain validation automation systems and
including drugs and • Carbon capture and energy • Smart agriculture meters
medical devices efficiency solutions technologies • Water testing and desalination
• Urban planning solutions • Companies that manage their • Sustainable production and equipment
and smart cities technologies carbon emissions effectively consumption practices and • Companies that effectively
• Companies that effectively solutions manage their water
address their employees’ consumption in operations
working conditions and and supply chains
their exposure to physical
climate risks
3 Igor A. Shiklomanov, “World Fresh Water Resources” chapter in “Water in Crisis: A Guide to the World’s Fresh Water Resources,” Peter H. Gleick (editor),
Oxford University Press, New York, 1993
4 Food and Agriculture Organization of the United Nations, Water use. Extracted from: http://www.fao.org/aquastat/en/overview/methodology/water-use/ in 2020
20 Investing in Asia Pacific May 2021Asset class preferences
As of 23 April 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)
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
Investing in Asia Pacific May 2021 21UBS APAC forecasts
APAC economic forecasts
% change y/y
GDP CPI
2019 2020E 2021E 2022E 2019 2020E 2021E 2022E
Australia 1.9 –2.4 5.0 3.3 1.6 0.8 2.2 1.7
New Zealand 2.4 –2.9 3.7 4.6 1.6 1.7 1.8 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 7.0 0.7 –1.1 2.5 1.9
Philippines 6.0 –9.5 6.7 9.4 2.5 2.6 4.3 3.2
Thailand 2.3 –6.1 3.3 6.8 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 –8.0 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 0.9
Asia ex-Japan 5.0 –1.0 8.2 6.4 2.9 2.8 2.4 2.8
APAC 4.4 –1.4 7.6 6.0 2.6 2.5 2.2 2.6
Source: UBS, as of 21 April 2021
22 Investing in Asia Pacific May 2021UBS APAC forecasts
APAC currencies versus the USD
We expect medium-term APAC FX appreciation versus the USD
20-Apr-21 Jun-21 Sep-21 Dec-21 Mar-22
USDCNY 6.50 6.35 6.35 6.35 6.35
USDIDR 14503 14400 14400 14400 14400
USDINR 74.7 73.0 73.0 73.0 73.0
USDKRW 1112 1100 1080 1080 1080
USDMYR 4.12 4.05 4.00 3.95 3.95
USDPHP 48.3 48.5 48.5 48.5 48.5
USDSGD 1.33 1.33 1.32 1.31 1.30
USDTHB 31.2 30.5 30.0 29.5 29.0
USDTWD 28.1 28.0 27.8 27.5 27.3
USDJPY 108 110 112 112 112
AUDUSD 0.78 0.80 0.81 0.82 0.83
NZDUSD 0.72 0.72 0.73 0.74 0.75
Source: Bloomberg, UBS, as of 20 April 2021
Investing in Asia Pacific May 2021 23UBS Chief Investment Office's ("CIO") investment views are prepared and published by the Global Wealth Management business of UBS
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