Asia Equity Strategy - Five questions - UBS

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UBS Investment Research
Asia Equity Strategy
Five questions


�� Five frequently asked questions by our clients
We answer five questions that we have frequently been asked in recent weeks:

1) What if the Fed disappoints with ‘QE2’?

2) What happens if Asian countries impose capital controls?

3) What if the Fed succeeds in raising inflation expectations?

4) Could commodity price inflation derail Asian equity markets?

5) Does big cap lead small cap in market euphoria, or vice versa?

�� Our answers

1) There is a risk of a ‘sell the news’ correction, but whether the Fed chooses to
‘shock and awe’ or implements QE2 ‘quarter-to-quarter’ does not change our
bullish view.

2) In historical instances, the equities market took a hit immediately
after the imposition of controls, but continued with the uptrend after, even though
the relative performance could become more subdued.

3) This is positive to Asia ex Japan equities if higher inflation expectations are the results of strengthening
growth momentum. If it is due to fears that the Fed could be losing control of
inflation – which we think is a ‘tail’ risk – then bad for equities.

4) Not at the moment though it could become a risk, especially in countries where inflation
pressures are already building (Indonesia and potentially India).

5) Small cap outperformed in the period leading up to the euphoria historically; large cap
outperformed in final euphoric run.





Summary of our Strategy View
We remain positive on 2010, with a year-end target of 570 on the MSCI Asia ex
Japan index. Liquidity challenges are we think behind us. If growth fears fade
we expect meaningful upside to Asia ex Japan equities.
Structurally, we think loose monetary policy and capital flows are likely to keep
driving up Asian asset prices. This is good for domestic asset prices and
consumption and by extension Asian financials and consumer stocks.
Our key country picks are Hong Kong, India and China. We like Hong Kong for
its valuation and earnings revisions and due to monetary policy. In India’s case
growth/valuations look attractive and it has the best long-term growth story in
the region in our view. We are neutral the G7 proxy markets of Taiwan and
Korea (previous underweight), as fears of a G7 recession seem to be fading and
valuation, in many instances, are reflecting recession fears. We are generally
underweight the expensive ASEAN markets. Of which Indonesia with low bond
yields, rising inflation and huge foreign ownership look the most vulnerable
beyond valuation. At the sector level, we are overweight financials, as the best
proxy for the liquidity theme and the credit cycle. We are underweight defensive
sectors, expecting them to underperform a rising market.
The risks to our view: On the upside, we see a risk (though not our base case)
that Asian equity valuations could go into extended range. We expect this to
occur at some point in this liquidity cycle, just not in 2010. On the downside,
there are many risks—mainly, in our opinion, due to inflation, and tight (not
simply tightening) monetary policy (either through policy rates or currency
appreciation). We are more sanguine on growth risks.