Better value in Asia-Pacific markets than US, says UBS

Investors baulking at the US sharemarket after a strong run up in recent months should look to Asia-Pacific markets, says UBS strategist Wayne Gordon.

The US sharemarket has been going gangbusters and that has put off some investors seeking value. Picture: Getty Images

Investors baulking at the US sharemarket after a strong run up in recent months should look to Asia-Pacific markets where valuations aren’t stretched and macro tailwinds are emerging, says UBS Wealth Management cross-asset and commodity strategist Wayne Gordon.

Amid US economic resilience and AI-related optimism, combined with the Fed’s pivot away from rate hikes and a big fall in bond yields, the S&P 500 is up more than 20 per cent since late October.

Restrained by China’s sharemarkets, the MSCI Asia Pacific index is up 14 per cent over the same time.

“Magnificent Seven” leader Nvidia is due to report after the US closes on Thursday (AEDT).

But with Fed officials in no rush to cut rates and recent US inflation data exceeding estimates, the amount of cuts priced for this year has dived from about 170 basis points to 90 basis points since the start of the year.

As hopes of rate cuts fade and inflation proves sticky, US bond yields are rising again.

The 10-year US bond yield is hitting 2½-month highs around 4.30 per cent.

Any further rise in US yields could renew concerns about sharemarket valuations.

In an unusual warning this week, minutes of the Reserve Bank’s February meeting said board members “noted that gains in US share prices were narrowly based and valuations there looked stretched”. They made no such warning about markets in other countries.

Mr Gordon says a soft landing in the US is likely as the consumer data is holding up well.

After a rise in shares prices sparked by the Fed’s pivot, economic data have been stronger than perhaps even the Fed expected, and the subsequent repricing of rate expectations has been significant. But the overall US market has been pushed up by gains in the Magnificent Seven tech giants – Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla.

“When we think about whether you buy more on the US side now, or do you look to diversify a bit more into markets which perhaps haven’t had the same level of run up at least to the index level, we believe that is indeed the case,” Mr Gordon says.

He sees good investment opportunities in Indonesia after the recent general election.

“Policy continuity for a country like Indonesia is a terrific boost,” Mr Gordon says. “Improving consumer and manufacturing outcomes, really monetising the resource base they have, is going to drive credit growth in Indonesia and its banks are well placed to benefit from this.”

UBS Wealth Management cross-asset and commodity strategist Wayne Gordon. Picture: John Feder

He also sees opportunities in India, albeit most of the exposure available to foreigners is in financials which have very strong metrics and tend to be expensive relative to their peers in emerging markets.

“Exposure to India is very much through the ability to be able to tap onshore ideas like discretionary consumption, real estate and the manufacturing and tech sector,” he says.

“For an overseas person this has to be done through a financial vehicle, but the structural factors like foreign direct investment and smoothing out of bureaucracy to enable that investment are exciting.”

India is in an election year but Mr Gordon says the Modi government looks set to be returned.

“Like Indonesia, this policy continuity is incredibly important and these sorts of factors will just see India continuing to build on its successes over the last couple of years.”

South Korea and Taiwan are now in a better position in the tech supply chain in his view.

“Obviously we had a chip shortage through the pandemic, then we saw a recovery in inventory and that put some pressure on the manufacturers that you’d be investing in there.

“But looking forward, that chip inventory is starting to tighten again.”

The bigger tech companies now have potential to boost their sales and profit margins in this view.

Of course China’s sharemarket is the sleeping giant amid ongoing property sector woes.

Reports of a strong pick-up in China’s travel and tourism over the Lunar New Year holidays and a bold 25 basis point cut in the five-year loan rate this week fell on deaf ears.

“The key issue with China currently is confidence,” Mr Gordon says.

“It’s not that dissimilar to Australia, where a lot of our wealth is tied up in real estate and in housing. In that context, through the issues around China’s housing developments and the tightening up of credit to parts of that segment, we’ve seen a significant dislocation in the real estate sector, with house prices and sales coming down sharply.”

While he doesn’t expect a “bazooka” policy like large fiscal stimulus or quantitative easing, he does see additional targeted easing and support for the housing and construction sector.

“The key is to stabilise property sales and property prices. They’ve undertaken a lot of measures over the last 12 months … it’s been very much sort of a drip feed approach.”

He now expects stronger policy messages from the National People’s Congress at the start of March.

“This is a critical date for investors in China to see a little bit more of what the government is going to do in a direct sense to support the housing sector now,” Mr Gordon says.

He expects the NPC to announce more support for its urban renewal program – not to the extent of its shantytown renovation policies before in 2015 and 2016 – but enough to begin to stabilise the property market, and particularly the housing market in China.

“Once that occurs, confidence can start to rebuild, and then that sort of virtuous influence of better confidence, better domestic spending on larger items. The key is to begin to change the direction of producer price inflation and consumer inflation.”

Full-blown quantitative easing is unlikely but he says stock buying efforts look to be underway. “Of course, that has to come with supportive policy on the monetary side, as well as on the fiscal side, but our expectation there remains positive on China at these sorts of valuations.

“Given the level of policy support that is coming and is likely to step up further, we think that at these valuations in the equity market, we think that people already invested in China should hold on, and we think that adding a bit of China exposure here is also a good diversification strategy.”