UBS is tactical 'overweight' on Asia ex-Japan equities in 2020

Singapore

ASIA'S largest wealth manager UBS has taken a tactical "overweight" allocation on Asia-ex Japan equities, taking a bet that Chinese Internet players and 5G beneficiaries will see a boost in 2020.

But this comes with a caveat as geopolitical uncertainties will continue to roil markets.

"We expect Asia ex-Japan's earnings growth to recover in 2020, led by tech-heavy markets like Korea and Taiwan, which should benefit from the 5G rollout," UBS said in a recent equity outlook report.

"The recent tech-led lift in activity in Asia adds to our confidence that global industry will turn around in the first half of 2020, and infrastructure investment is increasing throughout the region."

UBS said Chinese investment in 5G-linked technologies could prompt the revenues of upstream industries in Asia - that is, semiconductors and related equipment - to more than double annually over the next five years.

It added that operating margins should improve for Chinese Internet companies and businesses in the 5G smartphone supply chain.

"Overall capex discipline trends should remain intact, driven by increasing industry consolidation and a broader shift toward innovation-driven R&D spending."

UBS has also shifted its tactical allocation on Asian equities as steady cash flow generation in this region may support high dividends.

While Europe and the US have better dividend payout ratios - at 58 per cent and 41 per cent - than those in the region (36 per cent), Asia "has picked up of late from its post-financial-crisis average". This has been driven by corporates in Asia showing more investment discipline by deleveraging its debt in recent years, which raises financial flexibility. Regional companies also hold three times the amount of cash than they did two decades back, it noted.

Asian markets are due for a re-rating as they are trading around 5 per cent below their historical average levels.

On the flip side, UBS pointed out that trade-related uncertainty and slower economic growth may prevent a major re-rating beyond the historical mean.

The wealth manager took a "prudent" move to hedge its tactical Asian equity exposure by going long on the 10-year Treasury versus cash. "The growth environment is still soggy and a recovery may take more time to materialise," UBS said.

"If trade talks break down or macro weakness flares up, (Treasuries) could again rally from its current levels and provide some buffer to our position."

Specifically on the US-China trade front, signs are pointing to an imminent mini trade deal.

But the unpredictable nature of the relationship means geopolitical uncertainties may continue to pepper the outlook for 2020 as the long-term stumbling blocks - in technology and finance - towards a comprehensive deal still remain.

"While they may never be best friends, we think self-interest dictates that a full-on cold war is also unlikely," UBS said.

"That said, over the long run, we believe the risk of the two countries moving apart is rising, as what started as a trade dispute morphs into a battle for tech and financial supremacy."

Growth in the region is likely to remain stable. Gross domestic product for Asia ex-Japan is estimated to grow at 5.4 per cent in 2020 while growth in China could clock in at 5.7 per cent, UBS said.

Some Asian central banks still have the capacity to be more accomodative on monetary policy as well, UBS added.