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Asian economies first to rebound globally, according to UBS Wealth Management
In its latest report, "Asia Outlook second half 2009: Asia emerges stronger", UBS Wealth Management Research holds that Asia's strong rebound from the lows of the financial crisis is sustainable relative to its global peers. While the team acknowledges the risk of consolidation over the short term, it views Asia as having a leg up over the rest of the world given the region's fundamentals, liquidity, and existing investor positions.
"In the first half of 2009, Asian stock markets have outperformed their global peers significantly. While risky assets made significant gains, Asia has enjoyed bigger gains across various classes. After such a remarkable performance, some consolidation is likely; possibly driven by doubts about the global economic recovery or concerns that surging inflation will lead to early monetary tightening. However, we not expect markets to re-test recent troughs. After some consolidation, Asian stocks will probably continue to outperform the rest of the world," said Yonghao PU, Head of Wealth Management Research and Chief Investment Strategist, Asia Pacific, UBS Wealth Management.
UBS expects the recovery to be led by China, where fiscal stimulus is the main driver of economic growth and UBS forecasts GDP growth to reach 7.8% in 2009. Solid growth is also flagged in India and Indonesia, both of which were relatively sheltered from the global recession due to low export exposure.
"For most other Asian economies, we expect sharp contractions in terms of GDP growth in 2009. However, next year, there is likely to be a significant recovery with Asia ex-Japan/China/India posting growth of around 3.3% compared to a contraction of 2.9% in 2009," added Pu.
Pu is cautious on Asian currencies despite the better outlook for equities and bonds. Smaller trade surpluses, due to the collapse in exports and a potential correction on financial markets, should prevent significant gains against the US dollar, which is expected to further weaken against major currencies. Within Asia, the Chinese renminbi, Indian rupiah and Indonesian rupee are preferred over the next six months, largely as a result of their domestic-oriented economies.
The report recommends investors to take profit in stocks on further strength and to expect better entry points to emerge for those looking to build up exposure to global equities.
"While we do not expect any major economic setbacks within the next three months, it is likely to become more difficult for economic indicators to lift sentiment now that a recovery has become more widely anticipated. Nevertheless, while Asian equities no longer trade at a material discount to global equities, the more favorable economic outlook and less structural imbalances justify a focus on Asian equities," he added.
"Within Asia, China continues to be our favorite market with domestic demand likely to remain considerably stronger than in other markets. At the same time, valuations remain attractive and, indeed, have improved, in relative terms, since the beginning of the year.
India is another highly domestic-oriented economy and should be less affected by weaker global growth. And while valuations are no longer as attractive as before the elections, we do not think the Indian market is excessively expensive."
Pu believes Asian corporate bonds spreads will tighten over the next six months. "Globally, corporate credit continues to be the preferred asset class. Yields still overcompensate for assumed risks despite the expectations that default rates will rise further and, within Asia, our recommendation is to focus on industries that are less cyclical and vulnerable to the challenging economic environment, such as utilities and telecom," he added.
Within Asia, China continues to be Pu's favorite equity market as domestic demand is expected to remain considerably more robust than in other markets, not the least because of additional government spending. Pu forecasts GDP growth to reach 7.8% in 2009, followed by a further acceleration to 8.5% in 2010.
"Valuations of MSCI China remain attractive overall and have further improved in relative terms since the beginning of the year. At the same time, the operating environment for banks is improving due to continuing strong loan growth and a potential bottoming in net interest margins. Such trends should extend well into the second half of the year," added Pu.
Patrick HO, Head of Single Securities Research, Asia Pacific, UBS Wealth Management Research, remains cautious on the economic prospects for Hong Kong and forecasts GDP to contract 5.5% in 2009. Despite the bleak economic outlook he prefers Hong Kong equities within Asia as liquidity could support the market in the second half of 2009, while valuations of MSCI Hong Kong remain undemanding. "We prefer sectors that benefit from strong domestic demand and the robust growth in China. Hong Kong banks are among the preferred stocks. The utilities sector has also become more attractive as a hedge to any short-term corrections in the market," added Ho.