Equities to move higher on sustained economic recovery: UBS

THERE is more room for equities to move higher, even if economic data is not in line with recent market rallies, said Tan Min Lan, Asia-Pacific head of UBS's chief investment office, at a media teleconference on Wednesday,

Global equities are now down about 7 per cent year to date having rallied about 40 per cent from the lows of March 23. This is despite the pressure on global economies amid lockdowns in a bid to contain the novel coronavirus. In the US, for instance, unemployment rate for May stood at 13.3 per cent compared to 3.5 per cent in February. 

The apparent disconnect between markets and economies is essentially because the market is forward-looking and "will often look past the immediate damage," she said. 

"Our view is that the current quarter should mark a bottom to both growth and earnings globally," she added. UBS expects sustained economic recovery to begin in the third quarter of this year, and economic activities to normalise by the first half of 2021. 

Meanwhile it is important to watch the development on the medical front because that will be key in determining how confident the authorities will be when it comes to easing mobility restrictions, said Ms Tan.

On the potential of US-China tensions disrupting recovery, Ms Tan said that both parties are now focused on saving jobs and will likely avoid any "extreme moves that could undercut the economic recovery".

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With positive medical development and supportive fiscal and monetary stimulus, Ms Tan said that economies will be able to reopen sustainably without a second wave of infections overwhelming local healthcare systems.

Against such a backdrop, Ms Tan pointed to several investment opportunities to capture. Within equities, select cyclical and value stocks will close the gap with growth stocks, she said. These include UK equities, US mid-caps, eurozone industrials and German stocks. 

Meanwhile, in the face of potential market volatility where the impact of Covid-19 will be differentiated even among companies within the same sectors, gold and active management strategies like hedge funds may protect investors from potential downsides. 

"Instead of buying a broad index or broad basket of stocks, good stock pickers will be able to better identify the winners from the losers even within a single industry," she explained. 

There will also be investment opportunities in trends that were accelerated by the pandemic. 

"We expect increased focus on ESG (environmental, social and corporate governance) consideration from investors and governments and there will be reduced tolerance for unsustainable practices," said Ms Tan. 

Automation and robotics, on the other hand, will benefit from the trend of reshoring after the crisis blows over. Demand for e-commerce, cloud-based services and cybersecurity are also likely to be sustained. Healthcare will continue to see upside in areas of genetic therapies, oncology and telemedicine.

As interest rates continue to remain low, investors will be pushed to hunt for yield, said Ms Tan. UBS therefore favours US high-yield, US investment grade credit and EM Sovereign USD (US dollar) bonds.

Within Asia ex-Japan, equities and regional investment grade bonds are most preferred. Within the region, Chinese and Singapore equities are most preferred, while Hong Kong and Thai equities are least preferred.

Singapore is among preferred markets for its defensive high yield stocks and selected cyclical stocks that will benefit from the recovery, said Ms Tan.

High yield stocks include industrial Reits (real estate investment trusts) and telcos where yields are sustainable, and local banks that are now trading at around 5 to 6 per cent dividend yield. Land transport operators can also expect to see recovery as the economy reopens.