UBS Wealth Management CIO believes Chinese investment will moderate next year, but expects Southeast Asia to spend more and real investment growth to accelerate.
In the Swiss bank’s latest house view report, Mark Hafaele said Asian central banks will likely turn more hawkish and gradually raise rates from the second half of 2018.
While he remains positive on the region’s economic outlook, Hafaele noted that uncertainties about monetary policies and geopolitics mean that investors should ensure they hold diversified strategic asset allocation.
Examining Asia’s economic cycle, UBS believes Asia is entering the middle stage of its economic expansion. Growth is levelling out and the focus is shifting from trade recovery to investment and domestic consumption, it said.
While 2017 brought stabilization to the region as investment kept pace with output, the conditions are in place for real investment to accelerate from 5% to 8–9%, in its view.
Below are three key, Asia Pacific takeaways from the 2018 outlook release.
1. China to power through
China will maintain its policy direction, push for reforms, further open its onshore market, and step up its role in shaping the geopolitical environment in the year ahead, UBS believes.
It expects GDP growth to moderate 6.4%, a slowing housing market, as well as a breakdown in China-US relations.
China’s research and development (R&D) outlay will likely exceed the US’s in 2018, Hafaele noted, and Asia will likely overtake the US and EU combined by 2020.
Environmental protection, state-owned enterprise reforms, and capacity reduction plans, will likely broaden out over the coming year.
UBS said political uncertainty in the US and Europe is also leaving a void in global leadership for China to fill.
The Belt and Road Initiative suggests greater involvement in shaping the current geopolitical environment.
What’s more, Chinese A-shares into its benchmark indexes next year should prompt greater foreign participation in China’s onshore capital market, as China’s weighting in global investors’ portfolios is currently only 3%, it added.
2. Innovation will fuel Asia
UBS believes innovation will fuel Asia in the year ahead and beyond. It expects the region to lead to improving pricing power, rising margins, and, in turn, sustainable profit growth in the next few years.
The Swiss bank said there are three pillars supporting Asia’s innovation rise – growing talent, increasing access to capital and R&D spending, and favourable government policies.
‘A case in point is that R&D employees constitute 45% of total staff at Chinese internet companies, versus 25% for their US peers.
‘Asia’s innovation centers are also starting to rival Silicon Valley, while Asian companies are designing successful business models and attracting numerous venture capital investments.
‘[Furthermore] they include China’s 'Made in China 2025' initiative, India’s 'Digital India' roadmap, Japan’s push for a cashless society ahead of the 2020 Olympics, and Singapore’s 'Smart Nation' plan,’ Hafaele stated.
For investment, UBS recommends North Asia as Southeast Asian markets – excluding Singapore and Malaysia – are lagging their northern peers. It said India holds promise in sectors like healthcare and IT services.
For thematic ideas, it recommends our longer term investment themes like automation and robotics. Furthermore, education services, emerging market healthcare, and renewables, to name a few, should grow alongside the region’s emerging innovation process.
3. Equities, bonds, currencies, and real estate
UBS believes the trend strength in Asia ex-Japan equities can continue. It remains overweight China, Indonesia, and Thailand. Malaysia, the Philippines, and Taiwan are underweights.
It is also overweight the J.P. Morgan Asia Credit Index (JACI) high yield (HY) versus JACI investment grade (IG), but is neutral on Japan in its global tactical asset allocation.
The bank expects Southeast Asian markets and India to catch up with North Asia, and sees consumer laggards making gains against early cyclical stocks in 2018.
Asian credit returns should be limited to a carry of 3–4% in 2018, it said, adding ‘We like select corporate hybrids, non-rated Hong Kong and Chinese issuers, and short dated Chinese industrial bonds.’
Hong Kong remains in bubble territory but is stable in UBS’ view. Tokyo is still overvalued, Singapore is fairly valued and it expects China’s property market to adjust lower after it cooled in 2017.
It expects Asia ex-Japan (AxJ) currencies to appreciate by an average of 3% relative to the US dollar in 2018, and forecasts US-CNY at 6.5 in 12 months.