UBS research focus

UBS research focus - Asia's ascent

The economic center of gravity is shifting towards Asia. The latest UBS research focus, Asia's Ascent, examines the opportunities – and risks – for investors.

Zurich/Basel, 21 March 2007 – The sudden sell-off in China's domestic equity markets last month, and its immediate reverberations throughout Asia as well as the global financial markets, illustrate the relevance of developments in Asia to investors the world over. "Asia's Ascent", the latest research focus publication from UBS Wealth Management Research, investigates the growing commercial and financial ties between Asia and the rest of the world. It shows that global financial market performance will increasingly take cues from the region.

Three key trends investors may profit from Overall, the outlook for economic growth in Asia remains quite positive, although there are important differences between countries. UBS identifies three trends that have the potential to benefit from strong regional economic and earnings growth – and this means increasing investment opportunities:

Integrated: Asia's dominance as a supplier of goods and services to the global markets will likely remain unchallenged. In fact, this position should continue to develop as other newly emerging Asian countries embrace export-oriented economic policies of their own.

Urban: Asian urbanization will require massive infrastructure spending to ensure the provision of basic services, but also to maintain high rates of productivity growth.

Affluent: Not only will per capita incomes continue to rise in many emerging and newly industrialized Asian countries, but increased levels of affluence will likely translate into growth in spending and credit demand.

Asian financial market expansion and impact on global financial markets

Integration of Asian countries into the global commercial and financial system is occurring alongside an evolution in the region's financial markets. Although developments vary widely across Asia, certain trends are visible in many locations. Moreover the economic and financial market developments in Asia will likely produce sub-par returns for global bonds, global equity returns closer to the long term average, and the potential for well-supported commodity markets.

Equities: The size and liquidity of the Asian equity markets are increasing, and earnings growth is increasingly reflected within the region's equity market performance. However, in many Asian countries corporate governance standards are still weak, and equity markets exhibit higher volatility than stocks traded on developed country exchanges. While profit margins may remain higher than in the past, they are unlikely to expand and provide further support. With Asian countries less likely to continue providing disinflationary impulses to the world economy, liquidity will most likely not remain as supportive of risky assets.

Bonds: Asia's local currency bond market is growing rapidly. Countries are seeking to develop a liquid benchmark yield curve to improve access to fixed income markets among corporate borrowers. Global bonds offer limited interest income, and yields are likely to follow a slowly rising trend because of rising inflation expectations and more limited support from foreign capital inflows.

Real estate: Listed real estate is becoming an important financing vehicle in the region, and many markets have strong underlying fundamentals.

Commodities: Growing Asian demand for commodities means more business opportunities for commodity trading exchanges in the region and commodity importers. Asian industrialization and urbanization creates a positive environment for commodities through the end of the current decade. Global demand for commodities is expected to remain robust, while supply constraints are unlikely to be relaxed anytime soon.

"Asia's Ascent" provides a country by country analysis and highlights the trends that will continue to drive the region's development. This has implications for investors the world over.

Asia’s future impact on global financial markets
Neutral for stocks, negative for bonds, positive for commodities

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