UBS positive on global and Asia ex-Japan equities

Singapore

BRACE for sharp volatility in 2019, and the outsized impact of geopolitics on investment markets, UBS strategists said at the UBS Wealth Insights conference yesterday.

Still, a recession is not on the cards. Expectations for 3.6 per cent global growth are "slightly above long-term trend", said Mark Haefele, UBS Global Wealth Management chief investment officer.

The bank has an overweight call for Asia ex-Japan equities, where Tan Min Lan, head of APAC Investment Office, expects returns of 12 to 15 per cent this year, driven by attractive valuations.

Expectations for Singapore economic growth, however, are somewhat dim. Kelvin Tay, UBS regional chief investment officer, has a 2 per cent projected GDP growth for Singapore, citing Singapore's vulnerability to "full-on tariffs". "We're probably the most bearish... I hope we don't get this right. At 2 per cent growth, asset markets will slow, job creation goes negative, and this will hurt the property market."

Mr Haefele said investors should "stay invested according to their risk tolerance". Transition points in markets are when many investors make costly errors, such as being forced to sell amid market panic.

Historical data shows that for US stocks, the period of six to 18 months prior to recessions is when stocks generate strong double-digit returns. "We're overweight global equities, overweight US dollar sovereign emerging bonds... Balance sheets will matter, with an emphasis on quality companies, on value over growth."

Ms Tan said that economic growth in Asia is forecast at 5.8 per cent in 2019 compared to 6.2 per cent in 2018, but typical indicators such as consumption, investment and employment are not warning of recession. A potential reconfiguration of global supply chains would, however, cloud the region's investment outlook.

The silver lining is that with benign inflation, regional central banks are likely on hold, with China expected to ease policy.

Corporate fundamentals in Asia are attractive, she added. Asia ex-Japan's earnings per share growth is expected to outpace that of the US. In terms of valuations, the ratio of Asia's price to book value multiple against developed markets is the lowest in 15 years. The ratio of cash to market capitalisation of Asia ex-Japan (ex-financials) stocks is also at a record high.

In terms of Asian credits, she expects total returns this year of 3 to 4 per cent, compared to minus one per cent in 2018. She favours high yield bonds, with yield to maturity at 8.8 per cent, compared to investment grade bonds, with YTM of 4.8 per cent.

On Singapore equities, Mr Tay has called an overweight on the strength of valuations, despite a relatively soft view on the economy. "Singapore is cheap at the current level. Earnings yield is at 7 per cent compared to government securities at 2.1 per cent."

In a panel on US/China relations and the prospect of a new cold war, Professor Kishore Mahbubani, senior adviser (university and global relations), National University of Singapore, noted a fundamental shift among the US establishment in support of President Donald Trump when he "stands up" to China.

"The anxiety is that as you have this rising power, there is disappointment that China's ascent to the WTO did not produce a system more like the US. That has created real nervousness among the US establishment and uncertainty about the role of the US in the Pacific. Allies are anxious about being forced to choose...

"We should worry about rising geopolitical problems. The bad news for us is we'll be caught in the crossfire and we'll be asked to choose sides."