a monthly guide to investing in asia pacific ... - ubs...ubs cio gwm may 2019 3 investing in asia...

Investing in Asia PacificA monthly guide to investing in Asia Pacific financial markets

May 2019Chief Investment Office GWMInvestment Research

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Green shoots

EditorialGreen shoots ............................................................................. 3

Key ideas ................................................................................. 6

Economy .................................................................................. 8

Asset class viewsTactical asset allocation ............................................................ 12Asia ex-Japan equities .............................................................. 14Japanese equities ..................................................................... 15Bonds ...................................................................................... 16Currencies ............................................................................... 17

Contents

This report has been prepared by UBS AG and UBS Switzerland AG. Please see important disclaimers and disclosures at the end of the document.

Please note there may be changes to our house view and tactical asset allocation strategies prior to the next edition of Investing in Asia Pacific. For all updated views, please refer to the most recent UBS House View: Investment Strategy Guide.

UBS CIO GWM May 2019 3

Investing in Asia Pacific

Fortune certainly favored the brave in the first quar-ter. Our overweight on regional and global risk assets at the start of the year was rewarded with a near 15% gain in Asia ex-Japan (AxJ) equity mar-kets, a 22% recovery in China, and a 16% rally in the S&P 500, which is its best start to a calendar year since 1998. Markets were supported by reduced US-China trade tensions, the Federal Reserve’s dovish tilt, and Beijing’s determined eas-ing efforts. The region’s revival has been faster and stronger than we expected. Green shoots emerged in Chinese credit and fixed-asset investment data for the first quarter, China’s PMIs returned to expan-sionary territory in March, and the robustness of China’s turnaround suggests scope for consensus GDP and earnings upgrades in the months ahead. Data has also started to improve in Korea, Taiwan, and Vietnam, led by a semiconductor rebound and solid exports. And outside Asia, US jobless claims have fallen to their lowest level since 1996, Eurozone industrial production has shown signs of life (albeit not yet in Germany), and the Brexit dead-line extension to 31 October has reduced the immi-nent risk of a “no-deal” disruption.

Importantly, Asia’s long earnings downgrade cycle looks to be coming to an end and lower US Treasury yields and easing financial conditions should also be supportive of regional markets. That said, a strong profit upgrade cycle, like in 2016–17, seems unlikely at this point. And with GDP growth slowing globally – the IMF recently cut its estimate to 3.3% for 2019 from 3.5% – the rebound in trade regionally will likely only be moderate.

Mark Haefele Chief Investment Officer Global Wealth Management

Min Lan Tan Head Chief Investment Office APAC Global Wealth Management

EditorialGreen shoots

4 UBS CIO GWM May 2019


We’re recommending that investors Plan, Protect, and Grow to prepare for the months ahead. Volatility cannot be dis-counted following the sharp 1Q rally, so we “protect” by holding put options in our global portfolio and a collar option in our Asia strategy. And we position to “grow” amid the regional economic recovery by remaining moderately risk on.

Don’t overhype the yield curve inversionWe think concerns about the US yield curve’s recent inversion signaling an impending market downturn may be mis-placed for two reasons. First, today’s mac-roeconomic imbalances look benign com-pared to previous inversions (in 1989, 2000, and 2006), which were associated with rapid private sector credit growth and infla-tionary pressures. This makes this inversion potentially less meaningful.

Second, yield curve inversions tend to occur far in advance of a market peak. History suggests Asian equities peak on average only around 17 months after an inversion. And in the meantime, performance has ranged between +30% and +140% with cyclicals and large caps outperforming defensives and small/mid-caps. But volatility does tend to be higher after an inversion, so investors should consider protecting against downside risks. Growth is stabilizingIncoming data from China signals policy easing is strengthening the economy (we have upgraded 2019 GDP growth to 6.4% from 6.1%), and the rising likelihood of a US-China trade deal should boost consumer and business sentiment. A deal would also buy businesses more time to undertake planned adjustments to their supply chains.

A recent UBS Evidence Lab survey shows industrial migration – from North Asia to Southeast Asia – will continue irrespective of the trade outcome as firms seek to hedge future political risk and to manage costs. Improved semiconductor activity and better order-to-inventory ratios point towards a recovery of growth in 2Q and a turnaround in industrial production. Asian exports are already rebounding: Korea, Taiwan, and Vietnam reported big gains in exports in March, led by shipments to China. And dovish monetary policy should encourage consumer spending in 2H; we expect inter-est rate cuts in India, Indonesia, and the Philippines, and expect China to maintain a pro-growth policy stance notwithstanding stronger-than-expected 1Q numbers.

That said, we expect capex spending to remain subdued, and tepid US and German new manufacturing orders bear watching given their effect on inventories and pricing power in Asia. Asia TAA: Adding cyclicalitySo, has the market run too far ahead? We think not, and believe that earnings, which hold the key to the next leg up, are likely to improve alongside macro conditions. Hence, we remain overweight MSCI AxJ versus US IG bonds. Within equities, in addition to our overweights on China and Singapore, we add cyclicality by shifting Taiwan to overweight, turn underweight on Thailand, and maintain our underweights on Malaysia and Hong Kong. We also over-weight Japan (versus the Eurozone) in our global tactical asset allocation.

And in currencies, to take advantage of the Fed’s dovish pivot, we open a long



Indonesia rupiah versus Philippine peso position, which comes with an attractive 300bps carry. We remain long the Singapore dollar versus the Thai baht.

Equities: The recent 4Q earnings season was weak, with just one third of Asian companies beating expectations. Korea, Taiwan, and Thailand mostly disappointed, but Hong Kong and Indonesia fared better. Meanwhile, signs of stabilization are emerging in China’s producer prices and dynamics in the region’s IT sector are turn-ing up. As the earnings downgrade cycle inflects, we expect modest upside for stocks for the rest of the year. The region now trades at a price-to-book valuation of 1.57x, just below the 10-year mean (1.60x). Against this backdrop of modest earnings growth and subdued interest rates, we think growth and yield stocks should per-form best in Asia. We prefer large caps over mid- and small caps, and select tech and insurance leaders. We also see opportunity in companies exposed to structural growth in China’s Greater Bay Area, and those sup-porting the development of smart cities in the region. Credit: Asia high yield (HY) has continued its strong performance, taking its year-to-

Mark Haefele Min Lan Tan Chief Investment Officer Head Chief Investment Office APACGlobal Wealth Management Global Wealth Management

date return to 8.0%, outperforming Asia investment grade (IG) (3.9%). Dovish central banks, China’s easing policy, the improving macro picture, and strong emerging market debt inflows have driven the rally. We have updated our full-year return expectations for HY to 11–12% and IG to 5–6% to account for the year-to-date performance and coupon carry.

That said, technicals will likely be tested in the coming months as issuance picks up. With HY spreads now below 500bps and the dif-ferential between BB and B spreads below the 5-year average, we believe valuations have little room to compress further. We also expect some pick-up in spread volatility in 2H.

We prefer good-quality BB and B Chinese property bond issues with improving credit stories, perpetuals with higher step-up cou-pons, and select BBB rate issuers. FX: Asia-Pacific currencies have climbed almost 1% versus the US dollar on average this year. Within the region, we expect the Indonesian rupiah and the Indian rupee to deliver the best total returns over the next 12 months – both currencies yield about 5% relative to the USD. We anticipate USDCNY to trade in a stable range of 6.5–6.8 for the rest of the year.



Asset allocation

• The emergence of green shoots is supporting sentiment, as expected. We remain overweight MSCI AxJ in our APAC TAA strategy and hold onto the collar option for downside protection.

• We have decided to add cyclicality to our portfolio, opening an overweight position in MSCI Taiwan as well as an underweight one in Thailand. In the FX space, we have added an overweight position in the IDR versus the PHP for positive carry as well as expected spot rate appreciation of IDRPHP.

Key ideas

Economy

• As expected, 1Q turned out to be a very weak quarter across Asia – likely the weakest of the year – due to soft trade and domestic demand.

• But two signs point to a recovery in 2Q and beyond: trade growth and semiconductor activity improved in March, and monetary policy is easing thanks to a stable fed funds rate.

• Although a US yield curve inversion is a risk, a recession remains unlikely.

Equities

• Large caps over mid- and small caps as they should outperform during periods of slower growth.

• Select technology and insurance leaders, given the attractive mix of value and growth.

• Companies with structural growth opportunities, such as the beneficiaries of smart cities and Greater Bay Area developments.



Currencies

• Long SGDTHB. Deteriorating economic fundamentals in Thailand forebode a reversal of THB strength, while the SGD benefits from its central bank’s policy of gradual currency appreciation.

• Within APAC, we see the best total returns in the IDR and the INR over a 12-month horizon. A dovish Fed stance should underpin investors’ appetite for these high-yielding currencies.

Japanese equities

• Overweight Japanese versus Eurozone stocks in our global TAA. Japan and the Eurozone are heavily geared to the global cycle, but the Eurozone has priced in the recent improvement in economic data – especially in China – while Japan has not.

• Beneficiaries of China’s recovery. We like quality Japanese companies with large business operations in China. These companies’ share prices should rebound in tandem with the Chinese market in the coming months and should benefit from the CNY’s strength against the JPY.

• Digital payments. Government support for digital payment platformers is spurring rapid adoption. The top operators have strong barriers of entry and should enjoy a competitive advantage over the long run.

Bonds

• Select China property bond issues. We continue to like good-quality China property names and prefer BB to B from a valuation perspective. We particularly like improving credit stories and names committed to gaining rating upgrades.

• Perpetuals with strong structures. Select perpetuals with attractive yield pick-up and strong coupon step-up features at the call date offer attractive risk-reward.

• Select BBB bonds including Chinese government-related issuers: Within the IG space, we believe BBB will continue to outperform in the supportive market environment.



Springtime green shootsAs expected, 1Q turned out to be a very weak quarter across Asia – likely the weak-est of the year – due to soft trade and domestic demand. But two signs point to a recovery in 2Q and beyond: trade growth and semiconductor activity improved in March, and monetary policy is easing thanks to a stable fed funds rate. Also, although a US yield curve inversion is a risk, a recession remains unlikely.

Anatomy of the slowdownGDP growth slowed across Asia through 2H18 and we think it likely bottomed in 1Q19. As the US-China trade dispute esca-lated and US interest rates went up, indus-trial production slowed in the US, the EU and China, which in turn weakened global trade and the IT sector. Asian exports plum-meted to negative growth rates in 1Q19, hurting industrial incomes.

The region’s globally cyclical manufacturing economies (North Asia, Singapore and Viet-nam) saw their exports fall, inventories climb and producer pricing weaken. Invest-ment slowed. Meanwhile the more domes-tic-driven economies (India, Indonesia and the Philippines) were hit through the cur-rent account deficit channel. Those with external deficits went through a cycle of weaker exchange rates, lower foreign

exchange reserves and higher local interest rates. These mechanisms are still reducing GDP growth with a lag.

Signs of a turnaroundThe recent emergence of green shoots suggests a recovery from 2Q onwards. In the industrial sector, exports are starting to stabilize. While Asian export growth in January-February was weaker on a

Philip Wyatt, Economist Valerie Chan, Analyst

Source: CEIC, UBS, as of April 2019

Global industrial cyle and Asian exportsreach inflection point in March

–2

–4

2

00

10

–10

420

2017201620152014 2018 2019

Asia exports ex-Japan (SA) (in % y/y, LHS)

Forecast assumes 1Q frontloading reversal then‘2005-style’ G2 growth pattern (in % y/y, LHS)

Exports growth and forecast (in % y/y, LHS);G3 Industrial production growth (in % y/y, RHS)

G3 IP (in % y/y, RHS)

–20

Economy



sequential basis, the data in March was less negative for Korea, Taiwan and Vietnam, particularly for semiconductors. China is proving to be a port in the storm, as sequential exports from Korea, Taiwan and Singapore to China are turning much less negative. Improving Chinese soft data such as PMI new orders, which climbed further to 50.9 in March, gives grounds for hope. We expect Asian export growth to bounce into positive low-single-digit territory in April onwards.

IT leading the reboundThe preconditions for a turnaround in industrial production – from 1–2% growth currently – are falling into place. Just as it led the slowdown, the IT sector seems to be leading the rebound. Korea’s semicon-ductor inventory to shipments ratio started to decline in February. We expect to see similar trends in Taiwan and Japan as more March data gets released. New manufac-turing/machinery orders are a key leading indicator, and February data for Japan showed its first bounce to 3.5% m/m after consecutive declines since October. We are watching new manufacturing orders from the US and Germany for signs of a turna-round. We also expect pricing power, a key factor to monitor, to gradually recover as inventories drop.

Asia still easingOn the policy side, more central banks are adopting a dovish bias. Easier monetary policies across Asia should prompt a mod-erate recovery in spending. China’s easing is at a mature stage but has further to go – we see another 1–2 reserve requirement ratio cuts – as growth and trade stability remains a big challenge. India has cut policy rates twice this year and could cut again in 2H. The rest of Asia is lagging behind these two. In Indonesia and the Philippines, low inflation and more stable trade deficits allow for monetary easing via policy rate cuts and reserve requirement cuts.

Still, we forecast GDP growth will slow in 2019 to 5.8% from 6.1% in 2018. Easier monetary policies and turnarounds in trade and IT activity in 2H are unlikely to happen fast enough to offset the 1Q slowdown and lingering uncertainty surrounding the Sino-US trade talks.

US yield curve inversion and other risksAmong the risks, including delayed or stalled trade talks and a big oil price spike, the recent US yield curve inversion is the more serious concern given its lagged connection with US recessions. But moderate US yield curve inversions – such as today’s – do not necessarily herald a US recession, as the



context and degree of the inversion are key. As such, we still see recession risks as being low.

Three key periods of US 3-month – 10-year inversions (mid-1989, mid-2000 and mid-2006) differ from today in two important respects: they came after a period of more rapid overall private sector debt growth and they coincided with much higher positive real interest rates. In other words, the Fed was tightening to rein in a strong credit and inflation cycle. This is not the case today, as US private sector credit growth remains rel-atively moderate and real interest rates are close to zero (vs. 300bps+ in these other periods). Also, recent FOMC minutes sig-naled a preference to stay on hold and acknowledged a strong but slowing

underlying economy with steady CPI pressures. Policy seems less hawkish towards inflation and is therefore unlikely to create steeper inversion.

Lower risk-free rates, moderate reboundBut the flat or very moderately inverted yield curve, while not a serious recession concern, is coming alongside a period of slower US economic growth. For this rea-son we do not expect a powerful Asian export recovery beyond 5% this year. At the same time, lower US Treasury yields offer a lower risk-free rate for Asian assets. Asian local bonds have already rallied and moderate spread compression is likely where local fundamentals improve.

Asset class viewsTactical asset allocationAsia ex-Japan equitiesJapanese equitiesBondsCurrencies

Get

tyim

ages



Adrian Zuercher, Head APAC Asset Allocation Crystal Zhao, Strategist

Tactical asset allocation

It is happening We positioned our APAC TAA at the start of the year in a way to look beyond macro weakness in 1Q in order to benefit from a forecasted recovery in 2Q, when we thought easier global financial conditions would kick in. Encouragingly, high-frequency indicators, which can help identify a turn, have fallen in line with our expectations, in particular for China, Asia’s growth engine. In March, China’s manufacturing PMI rebounded to over 50 for the first time since October 2018 and credit growth was notably higher than consensus expected, with a significant pick-up in bank loans and a revival of shadow borrowing. These indicators are crucial to support already upbeat risk sentiment as the market seeks proof of earlier hopes.

Many investors have started to acknowledge the improving fundamentals, but the ques-tion is if the market has run too far already. We believe earnings hold the key for the next leg up. Analysts have consistently down-graded earnings for Asia ex-Japan (AxJ) FY19 earnings over the past 10 months, especially for the cyclical markets. But in March, the downgrade pace moderated overall and some North Asian countries saw earnings upgrades following the 4Q18 results season. With earnings likely to improve alongside macro conditions, we remain overweight regional equities (i.e. MSCI AxJ).

But despite the positive backdrop, we still hold a collar option on Asian equities for downside protection. The key risk for the market in this environment is central banks turning hawkish after economic conditions improve, which would heighten volatility in the short term. This makes it wise to stay protected via option strategies.

New intra-equity trades We think it’s time to add some pro-cyclical positions given the macro green shoots. In addition to our overweights on MSCI China

Improving China economic surprise index

Source: Citi, Bloomberg, UBS, as of April 2019

Green shoots in China’s macro data

100

50

0

150

Apr-18Apr-17Apr-16Apr-15Apr-14 Apr-19

–50

–100

–150

China economic surprise index



and MSCI Singapore, we turn overweight on MSCI Taiwan. Consensus has down-graded Taiwan’s FY19 earnings by 20%, but marginal upgrades began in March. Our technical indicator suggests Taiwan is one of the most oversold markets in the region, signaling the potential for outper-formance. And our bottom-up analysis sug-gests that the semiconductor cycle, which has been the main drag on Taiwanese stocks, will trough in the next few months.

We also open an underweight on MSCI Thailand due to sluggish domestic eco-nomic growth, lackluster earnings momen-tum and political uncertainties before a coalition government is formed. Elsewhere, we remain underweight MSCI Malaysia and MSCI Hong Kong.

New alpha opportunity in FX To seek more alpha in the FX space, this month we open an overweight IDR versus underweight PHP position in our APAC TAA strategy. We believe that basic balance-of-payment conditions (current account plus portfolio inflows plus foreign direct invest-ment) should benefit Indonesia more than the Philippines, while peaking US rates could spur more inflows to Indonesian local government bonds, supporting the IDR. Meanwhile, the Philippines still faces growth challenges as its domestic credit expansion

moderates. This IDRPHP pair also features a nearly 3% carry on a 12-month basis. In the risk case of a stronger USD or much higher US yields, the PHP would serve as a good hedge versus the IDR as the two countries share similar current account profiles.

Elsewhere, we remain overweight on the SGD versus the THB. The recent MAS meet-ing reaffirmed its policy of gradual SGD NEER appreciation, and we think the more dovish voting by Bank of Thailand officials indicates a delay in policy rate hikes, if they ever happen.

FY19 consensus earnings m/m change, in %

Source: Datastream, UBS, as of April 2019

Early signs of earnings stabilization

0

1

–1

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–3

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–5

Jan-19Oct-18Jul-18Apr-18Jan-18 Apr-19



Sundeep Gantori, Analyst Delwin Kurnia Limas, Analyst

Asia ex-Japan equities

Key investment ideas

Large caps over mid- and small caps as they should outperform during periods of slower growth.

Select technology and insurance leaders, given the attractive mix of value and growth.

Companies with structural growth opportunities, such as the benefi-ciaries of smart cities and Greater Bay Area developments.

Key trends

Opportunities outweigh risksIn 2019, earnings are likely to grow 5.3%, with China, Indonesia and India driving gains and Korea, Taiwan and Malaysia weighing on them. Despite the lack of a strong earnings recovery, negative revisions largely stabilized last month and there are signs forecasts will be revised higher. This, together with dovish central bank views globally, is supportive for Asian equities – we see further low-to-mid single-digit upside for the rest of 2019. Meanwhile, valuation appears fair at around 1.57 price-to-book ratio, 0.1 standard deviation below the 10-year mean of 1.60x. It’s also largely in line with the 1.55x fair P/B ratio, assum-ing 10.75% ROE and 8.0% cost of equity.

In March, markets were briefly under pres-sure due to an inverted US yield curve. While US yield curve inversions have histori-cally preceded recessions and market peaks,

they have done so with long delays. For Asian equities, we note the following:• Stocks have on average peaked about 17

months and returned 88% after the first inversion since the late 1980s – gains range from 31% during 1989–90 to 134% during 1998–00.

• Cyclicals outperformed defensives by 2.7ppts a month until they reached their market peaks, while large caps outper-formed mid- and small caps by 0.9ppt and 1.6ppts a month, respectively.

• Volatility during these periods was gener-ally higher at 19% on average, versus 16% over the past 10 years.

Relative to MSCI AxJ Index, in ppt difference

Source: Bloomberg, UBS, as of April 2019

Relative performance of different stylesfrom yield curve inversions to theirrespective market peaks

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10

0

30

Mid capsLarge capsDefensivesCyclicals Small caps

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Toru Ibayashi, Head Japan Equity Daiju Aoki, Regional Chief Investment Officer & Chief Japan Economist Chisa Kobayashi, Analyst

Japanese equities

International investors’ buy/sell amount(JPY trn, cash equity + futures)

Source: Bloomberg, UBS, as of 28 March 2019

We expect international investors’selling pressure to reverse in 2H

15

10

5

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2017

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2015

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2013

2012

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2019


Overweight Japanese versus Eurozone stocks in our global TAA. Japan and the Eurozone are heavily geared to the global cycle, but the Eurozone has priced in the recent improvement in economic data – espe-cially in China – while Japan has not.

Beneficiaries of China’s recovery. We like quality Japanese companies with large business operations in China. These companies’ share prices should rebound in tandem with the Chinese market in the coming months and should benefit from the CNY’s strength against the JPY.

Digital payments. Government sup-port for digital payment platformers is spurring rapid adoption. The top operators have strong barriers of entry and should enjoy a competitive advantage over the long run.

Key trends

Underpricing the global upliftJapan has been one of the worst-performing markets this year. Japanese stocks are up just 9%, compared to over 15% for global equi-ties. Uncertainties over trade negotiations between it and the US plus mixed activity signals have seen global investors steer clear – they account for 60–70% of total trading volume.

Overall, we think current valuations – the TOPIX at a forward P/E of 12.8x, versus the 10-year average of 14.0x – undervalue the improving global growth backdrop, particu-larly in China, a potential positive outcome from trade talks and rebounding corporate earnings growth, which should turn posi-tive in the September quarter. The upcom-ing Bank of Japan monetary policy meeting warrants watching, though we see support to domestic consumption (ahead of the VAT hike) as being driven more through fis-cal policy given the central’s bank’s limited room for further easing.



Devinda Paranathanthri, Analyst

Source: Bloomberg, JP Morgan, UBS, as of 10 April 2019

Asia credit spreads now in linewith the historical 5-year average

125

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Apr-18Apr-17Apr-16

IG spread 5Y average - 189bp

HY spread 5Y average - 500bp

Apr-15Apr-14 Apr-19

JACI IG spread (bp, LHS) JACI HY spread (bp, RHS)

We think scope for further spread compression is limited

Bonds


Select China property bond issues. We continue to like good-quality China property names and prefer BB to B from a valuation perspective. We particularly like improving credit stories and names committed to gaining rating upgrades.

Perpetuals with strong structures. Select perpetuals with attractive yield pick-up and strong coupon step-up features at the call date offer attractive risk-reward.

BBB

Select BBB bonds including Chinese government-related issuers: Within the IG space, we believe BBB will continue to outperform in the supportive market environment.

Key trends

Lifting return expectations after a strong 1QAsia high yield (HY) continued its strong per-formance, taking its year-to-date return to 8.0%, outperforming Asia investment grade (IG) (+3.9%). A number of factors contributed to the performance, including dovish central banks, positive macro data from China and strong inflows into emerging market (EM) hard-currency debt funds. Technicals, on the other hand, are starting to be tested with issu-ance continuing at a brisk pace, particularly for HY. Total issuance has reached USD 100bn this year, of which almost 46% is attributable to HY. While this has been absorbed well by

the market, in part helped by the strong fund flows, some new issues that were priced aggressively have underperformed. At the same time, with HY spreads now below 500bps and the differential between BB and B spreads below the 5-year average, we believe valuations have little room to compress fur-ther. The YTM now stands at 7.5% for Asian HY and 4.4% for Asian IG.

We have updated our full-year return expectations for HY to 11–12% and IG to 5–6%. These return forecasts take into account the strong performance in 1Q, the coupon carry attributable for the remainder of the year at 7.5% YTM and allow for some spread volatility during 2H19.



Teck Leng Tan, Analyst


Long SGDTHB. Deteriorating economic fundamentals in Thailand forebode a reversal of THB strength, while the SGD benefits from its central bank’s policy of gradual currency appreciation.

Within APAC, we see the best total returns in the IDR and the INR over a 12-month horizon. A dovish Fed stance should underpin investors’ appetite for these high-yielding currencies.

Key trends

Green shoots underpin Asia FX stabilityOur view for APAC currencies’ stability has been reinforced by recent green shoots of a global growth recovery. Regional PMI and export data is showing signs of improve-ment, helped by the prospect of a forth-coming US-China trade deal. Moreover, with the Fed having shifted to a neutral bias, regional central banks have room to loosen policy settings to support growth.

Against a backdrop of stabilizing global growth and benign US interest rates, we favor exposure to the IDR and the INR, both of which offer an attractive yield of around 5% versus the USD. Given our belief that the Fed has ended its rate-hiking cycle, the downside risk for these currencies looks limited, in our view.

USDCNY should trade in a stable range of 6.5–6.8 given the likelihood for a US-China trade deal. A trade agreement would provide further relief to China’s economic growth and capital flow dynamics. We expect the SGD to outperform the region thanks to the MAS’s policy of gradual currency apprecia-tion. On the other hand, we see room for the THB to weaken; the currency is trading at a 20-year high in trade-weighted terms, which looks unsustainable given Thailand’s deterio-rating economic fundamentals.

Expected spot return and yield carry over 12 months, in %

Source: Bloomberg, UBS, as of 17 April 2019

INR and IDR have the best total returnprofile over 12 months

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Expected 12M spot return vs USD

12M yield carry vs USD

Expected 12M total return

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TWD

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Currencies



UBS APAC economic forecastsIn % change y/y

Forecasts for APAC currencies versus the USDStable profile for APAC currencies over the next 12 months

Real GDP CPI

2017 2018F 2019F 2020F 2017 2018F 2019F 2020F

Australia 2.4 2.8 1.9 2.4 1.9 1.9 1.6 2.0

New Zealand 3.1 2.8 2.4 2.7 1.9 1.6 1.7 2.0

China 6.8 6.6 6.4 6.1 1.6 2.1 2.3 1.9

Vietnam 6.8 7.1 6.8 6.6 3.5 3.5 3.1 4.2

Indonesia 5.1 5.2 5.0 5.2 3.8 3.2 2.9 4.4

Malaysia 5.9 4.7 4.0 4.6 3.8 1.0 1.2 3.2

Philippines 6.7 6.2 6.1 6.1 2.9 5.2 2.9 3.5

Thailand 4.0 4.1 3.1 3.3 0.7 1.1 1.0 2.0

South Korea 3.1 2.7 2.5 2.9 1.9 1.5 0.7 1.4

Taiwan 3.1 2.6 2.3 2.5 0.6 1.4 0.8 1.5

India 7.2 7.0 7.1 7.3 3.6 3.4 3.7 4.2

Singapore 3.9 3.2 2.5 2.7 0.6 0.4 1.4 2.3

Hong Kong 3.8 3.2 2.7 3.0 1.5 2.4 2.4 3.1

Japan 1.9 0.8 1.4 1.2 0.5 1.0 1.2 2.0

Asia ex-Japan 6.3 6.1 5.8 5.9 1.5 2.4 2.2 2.5

APAC 5.7 5.5 5.3 5.3 2.0 2.3 2.1 2.5

Source: UBS, as of 17 April 2019

17-Apr-19 3M 6M 12M

USDCNY 6.71 6.70 6.70 6.70

USDHKD 7.84 7.80 7.80 7.80

USDIDR 14080 14000 14000 14000

USDINR 69.6 68.5 68.5 68.5

USDKRW 1136 1125 1125 1125

USDMYR 4.13 4.05 4.05 4.05

USDPHP 51.8 53.5 53.5 53.5

USDSGD 1.35 1.35 1.34 1.33

USDTHB 31.8 32.5 33.0 33.0

USDTWD 30.9 30.8 30.8 30.8

AUDUSD 0.71 0.71 0.68 0.68

NZDUSD 0.68 0.68 0.68 0.68

USDJPY 112 107 107 105

Source: Bloomberg, UBS, as of 17 April 2019



APAC-focused tactical asset allocation deviations from benchmark*

Liquidity

Equities total**

Glo

bal

eq

uit

ies

Asi

an e

qu

itie

s

Global

US

Eurozone

UK

Switzerland

Canada

Japan***

EM

Australia

Asia ex Japan

China

Hong Kong

India

Indonesia

South Korea

Malaysia

Philippines

Taiwan

Thailand

Singapore

underweight neutral overweight

* Please note that the bar charts show total portfolio preferences, which can be interpreted as the recommended deviation from the relevant portfolio benchmark for any given asset class and sub-asset class. ** We are holding a put option on the S&P 500 to partly protect the tactical asset allocation. *** Currency exposure of Japanese equities is not hedged.

We are holding a collar option strategy: long at the money put and short 10% out of the money call both on MXASJ Index to protect APAC tactical asset allocation.

Please note that the TAA charts now integrate positions previously classified as “cyclical trades”, represented here above as“new (1–4 years horizon)”.

Source: UBS, as of 17 April 2019

Bo

nd

sD

urat

ion

Cu

rren

cies

underweight neutral overweight

Bonds total

USD high grade bonds

USD corporate bonds (IG)

USD high yield bonds

EUR high yield bonds

EUR corporate bonds (IG)

Italian 2y govt. bonds

Asian investment grade bonds (USD)

Asian high yield bonds (USD)

EM sovereign bonds (USD)

EM corporate bonds (USD)

EM bonds (local currencies)

USD duration

JPY duration

USD

EUR

GBP

JPY

CHF

CAD

NZD

AUD

NOK

SGD

IDR

PHP

INR

THB

new (up to 12m horizon)new (1–4 years horizon) Old

Tactical asset allocation

These preferences are designed for a global investor who can hedge foreign currency fluctuations. For models that are tailored to US investors, please see UBS House View Monthly Letter.



Editor-in-chiefWayne Gordon

Product managementMichael Cheong Daryl Tan

EditorsAaron Kreuscher Murugesan Suppayyan

Desktop publishingPavan Mekala*

Editorial deadline18 April 2019

Contactubs.com/cio

* An employee of Cognizant Group. Cognizant staff provides support services to UBS.



ESG/Sustainable Investing Considerations: Sustainable investing strategies aim to consider and in some instances integrate the analysis of environmental, social and governance (ESG) fac-tors into the investment process and portfolio. Strategies across geographies and styles approach ESG analysis and incorporate the findings in a variety of ways. Incorporating ESG factors or Sus-tainable Investing considerations may inhibit the portfolio manager’s ability to participate in cer-tain investment opportunities that otherwise would be consistent with its investment objective and other principal investment strategies. The returns on a portfolio consisting primarily of ESG or sustainable investments may be lower or higher than a portfolio where such factors are not considered by the portfolio manager. Because sustainability criteria can exclude some invest-ments, investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such criteria. Companies may not necessarily meet high performance standards on all aspects of ESG or sustainable investing issues; there is also no guarantee that any company will meet expectations in connection with corporate responsibility, sustainability, and/or impact performance.

Emerging Market InvestmentsInvestors should be aware that Emerging Market assets are subject to, amongst others, potential risks linked to currency volatility, abrupt changes in the cost of capital and the economic growth outlook, as well as regulatory and socio-political risk, interest rate risk and higher credit risk. Assets can sometimes be very illiquid and liquidity conditions can abruptly worsen. CIO GWM generally recommends only those securities it believes have been registered under Federal U.S. registration rules (Section 12 of the Securities Exchange Act of 1934) and individual State registra-tion rules (commonly known as “Blue Sky” laws). Prospective investors should be aware that to the extent permitted under US law, CIO GWM may from time to time recommend bonds that are not registered under US or State securities laws. These bonds may be issued in jurisdictions where the level of required disclosures to be made by issuers is not as frequent or complete as that required by US laws.

For more background on emerging markets generally, see the CIO GWM Education Notes, Emerg-ing Market Bonds: Understanding Emerging Market Bonds, 12 August 2009 and Emerging Mar-kets Bonds: Understanding Sovereign Risk, 17 December 2009.

Investors interested in holding bonds for a longer period are advised to select the bonds of those sovereigns with the highest credit ratings (in the investment grade band). Such an approach should decrease the risk that an investor could end up holding bonds on which the sovereign has defaulted. Sub-investment grade bonds are recommended only for clients with a higher risk toler-ance and who seek to hold higher yielding bonds for shorter periods only.

DisclaimerUBS Chief Investment Office’s (“CIO”) investment views are prepared and published by the Glob-al Wealth Management business of UBS Switzerland AG (regulated by FINMA in Switzerland) or its affiliates (“UBS”).

The investment views have been prepared in accordance with legal requirements designed to promote the independence of investment research.



Generic investment research – Risk information:This publication is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. The analysis contained herein does not constitute a personal recommendation or take into account the particular investment objectives, investment strategies, financial situation and needs of any specific recipient. It is based on numerous assumptions. Different assumptions could result in materially different results. Cer-tain services and products are subject to legal restrictions and cannot be offered worldwide on an unrestricted basis and/or may not be eligible for sale to all investors. All information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to its accuracy or completeness (other than disclosures relating to UBS). All information and opinions as well as any forecasts, estimates and market prices indicated are current as of the date of this report, and are subject to change without notice. Opinions expressed herein may differ or be contrary to those expressed by other business areas or divisions of UBS as a result of using different assumptions and/or criteria.

In no circumstances may this document or any of the information (including any forecast, value, index or other calculated amount (“Values”)) be used for any of the following purposes (i) valua-tion or accounting purposes; (ii) to determine the amounts due or payable, the price or the value of any financial instrument or financial contract; or (iii) to measure the performance of any financial instrument including, without limitation, for the purpose of tracking the return or performance of any Value or of defining the asset allocation of portfolio or of computing performance fees. By receiving this document and the information you will be deemed to represent and warrant to UBS that you will not use this document or otherwise rely on any of the information for any of the above purposes. UBS and any of its directors or employees may be entitled at any time to hold long or short positions in investment instruments referred to herein, carry out transactions involving rel-evant investment instruments in the capacity of principal or agent, or provide any other services or have officers, who serve as directors, either to/for the issuer, the investment instrument itself or to/for any company commercially or financially affiliated to such issuers. At any time, investment deci-sions (including whether to buy, sell or hold securities) made by UBS and its employees may differ from or be contrary to the opinions expressed in UBS research publications. Some investments may not be readily realizable since the market in the securities is illiquid and therefore valuing the in-vestment and identifying the risk to which you are exposed may be difficult to quantify. UBS relies on information barriers to control the flow of information contained in one or more areas within UBS, into other areas, units, divisions or affiliates of UBS. Futures and options trading is not suit-able for every investor as there is a substantial risk of loss, and losses in excess of an initial invest-ment may occur. Past performance of an investment is no guarantee for its future performance. Additional information will be made available upon request. Some investments may be subject to sudden and large falls in value and on realization you may receive back less than you invested or may be required to pay more. Changes in foreign exchange rates may have an adverse effect on the price, value or income of an investment. The analyst(s) responsible for the preparation of this report may interact with trading desk personnel, sales personnel and other constituencies for the purpose of gathering, synthesizing and interpreting market information.

Tax treatment depends on the individual circumstances and may be subject to change in the future. UBS does not provide legal or tax advice and makes no representations as to the tax treat-ment of assets or the investment returns thereon both in general or with reference to specific client’s circumstances and needs. We are of necessity unable to take into account the particu-lar investment objectives, financial situation and needs of our individual clients and we would



recommend that you take financial and/or tax advice as to the implications (including tax) of investing in any of the products mentioned herein.

This material may not be reproduced or copies circulated without prior authority of UBS. Unless oth-erwise agreed in writing UBS expressly prohibits the distribution and transfer of this material to third parties for any reason. UBS accepts no liability whatsoever for any claims or lawsuits from any third parties arising from the use or distribution of this material. This report is for distribution only under such circumstances as may be permitted by applicable law. For information on the ways in which CIO manages conflicts and maintains independence of its investment views and publication offering, and research and rating methodologies, please visit www.ubs.com/research. Additional information on the relevant authors of this publication and other CIO publication(s) referenced in this report; and copies of any past reports on this topic; are available upon request from your client advisor.

Important Information about Sustainable Investing Strategies: Incorporating environ-mental, social and governance (ESG) factors or Sustainable Investing considerations may inhibit the portfolio manager’s ability to participate in certain investment opportunities that otherwise would be consistent with its investment objective and other principal investment strategies. The returns on a portfolio consisting primarily of ESG or sustainable investments may be lower than a portfolio where such factors are not considered by the portfolio manager. Because sustainability criteria can exclude some investments, investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such criteria. Companies may not necessarily meet high performance standards on all aspects of ESG or sustainable investing issues; there is also no guarantee that any company will meet expectations in connection with corporate responsibility, sustainability, and/or impact performance.

Distributed to US persons by UBS Financial Services Inc. or UBS Securities LLC, subsidiaries of UBS AG. UBS Switzerland AG, UBS Europe SE, UBS Bank, S.A., UBS Brasil Administradora de Valores Mobiliarios Ltda, UBS Asesores Mexico, S.A. de C.V., UBS Securities Japan Co., Ltd, UBS Wealth Management Israel Ltd and UBS Menkul Degerler AS are affiliates of UBS AG. UBS Financial Services Incorporated of Puerto Rico is a subsidiary of UBS Financial Services Inc. UBS Financial Services Inc. accepts responsibility for the content of a report prepared by a non-US affiliate when it dis-tributes reports to US persons. All transactions by a US person in the securities mentioned in this report should be effected through a US-registered broker dealer affiliated with UBS, and not through a non-US affiliate. The contents of this report have not been and will not be approved by any securities or investment authority in the United States or elsewhere. UBS Financial Services Inc. is not acting as a municipal advisor to any municipal entity or obligated person within the meaning of Section 15B of the Securities Exchange Act (the “Municipal Advisor Rule”) and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of the Municipal Advisor Rule.

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