UBS:: What to buy in a bounce

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UBS Investment Research
 Asia Equity Strategy
What to buy in a bounce
 
„ Sentiment, technicals, valuation all look washed out
Sentiment and technical indicators look washed out. Valuations (11.2x earnings)
are close to historical trough levels off which Asian equities have typically
bounced. Earnings have some downside risks but overall, markets are at the lower
end of their trading range since November last year, and look ready for a bounce.
„ Sentiment reflects several risks of which Greece remains the main threat
Sentiment is reflecting four fears in our view - US slowdown, China hard landing,
high oil prices and the Greek situation. We are relaxed about the global growth soft
patch, less concerned by oil prices, especially after the IEA’s recent move on
stockpiles. China fears remain – inflation still in our view holds the key here but
we remain sanguine that a hard landing will be avoided. By far the greatest risk
remains Greek contagion in our view. If Greek threats dissipate for now, we think
the current environment is ripe for a bounce in Asia equities. This remains a
serious downside threat until resolved.  
„ Looking for a rebound in recent underperformers
We screen for stocks that have underperformed and have good earnings
momentum (among which are ICBC ‘H’ – UBS Key Call, Bank of China ‘H’,
Reliance Infrastructure; table 2); have underperformed meaningfully and look
inexpensive, relative to history (Esprit, China High Speed Transmission; table 3);
have underperformed the most since the April peak (several stocks in China, which
include Sihuan Pharmaceutical ; table 4). Full lists on page 7-10. We have created
UBS Custom Indices available on Bloomberg at ticker UBASLAg1 Index (Table
2) and UBASLAg2 Index (Table 3).