UBS tips equity pickup, mulls product implications
Swiss bank UBS expects to develop and distribute more equity-related products for its wealthy clients next year despite the fact they are still risk averse.
The firm sees a rotation from Asian bonds into equities, on valuation grounds. Yonghao Pu, Asia-Pacific chief investment officer for UBS Wealth Management, points to an expected uptick in demand.
He notes that the MSCI Asia ex-Japan Index is currently trading at 11.4 times 12-month forward price-to-earnings (P/E) ratio, compared with a historical average of 12.2x. At the same time it has outperformed, gaining 18.6% in the year to December 3, compared with about 13% for S&P500.
The bank argues that China and Korea are notably attractive buys, with 12-month forward P/Es of 9.4x and 8.3x respectively, versus 10-year historical averages of 12.1x and 9.4x.
Further, Pu points to a potential rebound in China’s economy, with anticipation of earnings from cyclical stocks growing by an average of almost 10% in 2013. He notes that financials and healthcare stocks appear attractive, both trading at a healthy discount.
“If you are looking to capture this kind of recovery, you can increase exposure to the cyclical sector in the beginning and once that becomes relatively unfairly valued you can shift more towards defensive sectors where earnings are more stable,” he reflects.
On the question of investor appetite, Pu confirms that while UBS's wealthy clients are still largely averse to equities, in the fourth quarter the bank has seen them engage more. Their equity exposure remains low at around 30%, with a high portion in cash and fixed income.
Pu concedes that Asian bonds have been strong performers this year, with Asia ex-Japan corporate credits offering a total return of 14.2% and high-yield bonds 21.2%, by the JP Morgan Asia Credit Index.
But Pu sees valuations tightening as yields edge towards their historical average: high-yield credits, for instance, are trading at 6.7%, compared with a 7-8% historical average. Looking ahead, inflation is a worry in certain countries, notably Malaysia, Indonesia and the Philippines.
Meanwhile the bank forecasts 2-3% appreciation in Asian currencies amid increased demand against a backdrop of quantitative easing from central banks elsewhere.
The Korean won is seen as attractive, still around 17% weaker against the US dollar compared with 2007 levels and amid signs of recovery in Korean exports.
The November reading on HSBC’s Korea Purchasing Managers’ Index hit a five-month high of 48.2 in November. While a reading below 50 indicates contraction, the pace of decline has slowed, suggesting Asia’s fourth largest economy may be stabilising.
Equally, UBS sees upside in the renminbi – albeit modest – and an opportunity for investors to enhance returns via exposure to high-quality dim-sum bonds. That market made an average return of 1.7% in October, as reported, of which around 60% was due to RMB appreciation. That compared with a 0.9% return for local currency bonds.
Separately, Pu believes that the strong growth of China’s high-net-worth population may be over as the factors that once drove their rise to riches have come to a standstill. He points in particular to exports, commodity and iron-ore mining and IPO deal activity.
“China will have more stable growth in the future, but the strong growth over the past 12 years will probably be over,” suspects Pu. “China’s strong wealth growth is generated from a number of areas which it is going to see much less of in the future.”
As indicators of this trend, he highlights negative growth in Macau’s gaming revenue – 10% year-on-year as at October compared with nearly 100% in 2010 – and a decline in gold, silver and jewellery retail sales from a peak of Rmb42 billion in 2011 to Rmb30 billion in 2012.
According to the 2012 Asia-Pacific Wealth Report, compiled by consultancy Capgemini in collaboration with RBC Wealth Management, growth in China’s HNWI population with at least $1 million in investable assets shrank to 5.2% in 2010-11, from 12% in 2009-10.