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UBS bets on EMs; India among most preferred destinations

By Puneet Wadhwa
April 27, 2021 13:23 IST
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Over the next three - six months, UBS believes earnings will be the main driver for EM equities outperformance.

Investment destination

Illustration: Uttam Ghosh/

Despite the raging Covid pandemic and its impact on the economy, India is one of the ‘most preferred’ equity markets for UBS.

Besides India, China and Singapore markets also figure as the ‘most preferred’ destinations.

At a macro level, however, it remains bullish on emerging markets (EMs) as compared to the developed market (DM) peers, where it feels that the returns will remain in single-digits going ahead.


Markets, it feels, are now transitioning to a more mature phase of the recovery trade.

The initial stage, according to the global research and brokerage house, was characterised by unprecedented policy intervention, which saw real rates collapsing and price-to-earnings (P/E) expansion supporting equities.

“With earnings growth accelerating, higher bond yields should not derail the positive equity performance.

"As such, we expect further upside in the coming 6 – 12 months, driven mainly by the cheaper segments such as select cyclical and value stocks.

"We keep EMs at ‘Most Preferred’, as their valuations are attractive compared with those of DMs,” wrote Mark Haefele, global chief investment officer at UBS in an April 22 note.

The macro improvement in EM should continue amid still-ample global monetary and fiscal policy support and high commodity prices, UBS said.

Corporate fundamentals, it believes, remain healthy, with the majority of EMs presenting positive earnings momentum.

In the driver’s seat

Over the next three – six months, UBS believes earnings will be the main driver for EM equities outperformance.

EM, it said, will continue to benefit from the continued value-led rebound, followed by a pickup in areas with resilient growth and structural opportunities.

“We expect valuations to gradually normalise as earnings pick up, but EM valuation multiples remain attractive and justified compared to DM.

"We expect promising Q1-FY21 earnings reports in EM, led by cyclical and value sectors.

"Valuations are relatively attractive, too, especially given our expectation for double-digit EPS growth over the next 12 months,” Haefele said.

Among EMs, UBS likes Russia, China, India, and Singapore.

Their least preferred markets are Hong Kong and the Philippines.

Value stocks, UBS believes, will outperform in the coming months.

“Value stocks have been ignored and heavily discounted in EMs over the past decade, underperforming secular growth stocks by close to 70 per cent.

"Value has great catch-up potential and less concentration risk relative to the broader EM, in our view.

"The theme gives investors the opportunity to rebalance their portfolios and position for a cyclical economic rebound, with the last leg of the EM recovery rally driven by high-dividend-yield value stocks,” UBS said.

In the Asian (ex-Japan) region, UBS sees opportunities in six industry groups — capital goods, construction materials, consumer services, transportation, banks, and metals & mining, which it believes should benefit from the ongoing economic recovery and earnings rebound as well as offer diversification from tech exposure.

The key risks to the EM equity outperformance, however, are new lockdowns triggered by COVID-19, delays in vaccine distribution, a further significant rise in US interest rates, a stronger US dollar, and vulnerable fiscal accounts.

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Puneet Wadhwa
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