At a glance
Not all regions will have the same experience in dealing with the COVID-19 outbreak, meaning diversification across all asset classes and regions remains paramount. We see a strong case for Asia ex-Japan stocks, as countries across North Asia have passed the trough on some macroeconomic indicators. In addition, taking a longer-term view, many companies in Asia are structurally exposed to key long-term trends such as urbanization and digital transformation that we believe will drive exceptional growth in the decades ahead.
COVID-19 sell-off has created an opportunity in Asian stocks
The events of the past few months have made it clear, that not all regions will have the same experience in dealing with the coronavirus. It is impossible to know for sure which areas will see the most durable recovery, so it is important to make sure portfolios are well diversified across regions. At present, we see a strong opportunity in Asian stocks, as macroeconomic indicators across North Asia are pointing to year-on-year growth again.
With a further easing of mobility restrictions across key markets in Asia, we expect earnings to recover from 3Q20 onward. In 2021, we project earnings will grow by more than 15%, led by South Korea and India. By sector, tech, energy, consumer discretionary and materials will likely drive earnings growth next year. At the moment, valuations are still attractive, with Asia ex-Japan stocks trading at a 1.4x price-to-book ratio, below their long-term average of 1.6x, which still provides a good entry point for investors.
Within the Asia ex-Japan market, as economies reopen, investors should consider stocks that are best positioned to benefit from easing restrictions and a likely revival in discretionary spending. We expect the rotation to laggards to continue and maintain our preference for these reopening beneficiaries. In the medium term, we prefer select technology platforms and quality cyclicals (insurance companies and banks). In tech, the biggest China platform companies should continue to grow steadily, and the more cyclical large-cap Taiwan and Korean hardware companies should benefit from the economic recovery. Over the longer-term, we like Asian companies exposed to key long-term trends—such as urbanization and digital transformation—that we believe will drive exceptional growth. These include companies involved in the development of China intelligent infrastructure, and the ASEAN new economy––two structural themes that have also received a boost from the COVID-19 pandemic.
We view this year’s drop in Asian markets as an opportunity to add exposure, especially for the long term. Many of the most significant identifiable longer-term opportunities in the coming decade of transformation are expected to play out in Asia, including infrastructure, healthcare, and digital transformation. Finally, we believe the region's leaders in environmental, social, and governance (ESG) factors can deliver superior performance because ESG leaders tend to be companies with superior corporate governance.
Key investment takeaways:
- We recommend investors diversify globally because not all countries will have the same experience in dealing with the coronavirus.
- We see a strong opportunity in Asia where macroeconomic indicators have started to recover.
- Long-term investors can increase exposure to companies that look set to benefit from long-term secular trends, from urbanization to digital transformation.
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