A monthly guide to investing in Asia Pacific financial markets

Investing in Asia Pacific

August 2020
Chief Investment Office GWM
Investment Research

Next steps in the

recovery
Investing in Asia Pacific

Investing in Asia Pacific

This report has been prepared by UBS AG Singapore Branch,
UBS AG Hong Kong Branch and UBS Switzerland AG

Editor-in-chief
Wayne Gordon Editorial deadline
17 July 2020
Product management
Rajesh Donthula* Languages
Sita Chavali Published in English, Chinese (Traditional and Simplified)
Delwin Kurnia Limas Translations
Editors Rachel Lee
Aaron Kreuscher Bianhua Gao
Murugesan Suppayyan Danjun Zheng

Desktop publishing Contact

Pavan Mekala* ubs.com/cio

Pictures
Gettyimages * An employee of Cognizant Group.
Cover image: For illustrative purposes only. Cognizant staff provides support services to UBS.

UBS CIO GWM August 2020 2

 Investing in Asia Pacific

Contents

04 Editorial

06 Asia monthly outlook

Positioning for the consumption recovery

11 Tactical views
12 Asset allocation
13 Equities
14 Japanese equities
15 Bonds
16 Currencies
17 Commodities

19 UBS APAC forecasts

21 Investment spotlight
Asian high yield bonds and long Indian rupee

Important disclosure
Please see the important disclaimer at the end of the document.
Please note there may be changes to our house view strategies prior to the next edition of Investing in Asia Pacific. For all updated views, please
refer to the UBS House View Monthly Extended at any time of the month or contact your advisor.

UBS CIO GWM August 2020 3

Investing in Asia Pacific

Editorial
Dear reader,

Asia's recovery continues to outpace its peers, and investors are rewarding the
region accordingly. The Asia ex-Japan benchmark stock index has outperformed
the S&P 500 by 6% since mid-June, with domestic Chinese stocks leading the
charge—the onshore CSI 300 Index is up 29% since its March low.

We see more upside ahead. Asia, in our view, is entering the next phase of its
recovery, with trade and consumption likely to power growth in 2H20. Recent
macroeconomic data supports this view. China's purchasing manager index and
industrial output numbers are back to pre-COVID levels, with consumption on the Mark Haefele
rise (consumer credit and housing) and trade returning to year-on-year growth. Chief Investment Officer
Global Wealth Management

Virus outbreaks are still red flags. The good news is that governments are acting
swiftly, and data suggests that infection rates in South and Southeast Asia could
be close to peaking or have already peaked. The situation in the US is concerning
and needs to be closely monitored, but broad restrictions are unlikely to be
imposed again.

Further progress on vaccine development is heartening. In the US, we expect policy

support to be robust regardless of who wins the US presidential election. Still,
volatility is bound to rise in the run-up to November as the policy platforms of both
parties are unveiled.

This backdrop, overall, gives us confidence to stay risk-on in the region and
Min Lan Tan
globally. We see further upside in China despite the strong rally, but expect gains
Head Chief Investment Office APAC
going forward to be more in line with regional equities. Elsewhere, we see value in Global Wealth Management
laggards—India and Singapore are most preferred, while Hong Kong, Malaysia,
and Thailand are least preferred.

Sector-wise, we expect tech to stay in the driver’s seat with the pandemic
accelerating long-term trends, and consumer discretionary to rise to the fore. We Follow us on
see tactical opportunities in Singapore’s banks and favor the key beneficiaries—
i.e., those that stand the most to gain—of further economic reopening.
linkedin.com/in/markhaefele
The search for yield should underpin further spread tightening in Asia investment linkedin.com/in/minlantan
grade credit. We also like high yield, particularly China property. And in currencies,
the INR and the KRW are most preferred.
twitter.com/UBS_CIO
Strained US-China relations bear watching. But we see more to gain by staying
invested and weathering the uncertainty than sitting on the sidelines. We also like
gold as a diversifier in a low-yield world.

Mark Haefele Min Lan Tan

UBS CIO GWM August 2020 4

 Investing in Asia Pacific

Key investment ideas

Asset allocation Equities

• Asia ex-Japan equities most preferred • Quality cyclicals (IT,

• Asian IG bonds most preferred
• Singapore and India most preferred, while
Hong Kong, Malaysia and Thailand least
preferred
communication services and
consumer discretionary)
• Select laggards which are
positioned to benefit from
easing restrictions
• Structural themes such as
China’s intelligent infrastructure
and ASEAN’s new economy

Currencies

• Long INR vs. USD: We like the

INR for its attractive yield carry
and catch-up potential
• Long KRW and JPY vs. TWD to
Japanese equities position for a global economic
growth rebound
• Buy Japan’s recovering • Short USD vs. JPY to position
consumption for broader USD weakness
• Japan’s new mobility to
gain traction next year
• Japanese REITs are
beneficiaries of low
interest rates

Bonds

• China property sector in

HY– look for better quality
names Commodities
• BBB-rated corporate bonds
in Asia IG • Long gold
• Select corporate perpetuals • Long base metals
in Asia IG • Volatility selling in crude oil

UBS CIO GWM August 2020 5

Investing in Asia Pacific

Asia monthly outlook

Positioning for the consumption

recovery

UBS CIO GWM August 2020 6


Asia monthly outlook
Positioning for the consumption
recovery
The strategy of holding quality cyclicals should work for investors seeking growth
and long-term secular business models. China and Taiwan offer the highest
exposure to quality cyclicals, whereas ASEAN's shift to the new economy is only
now starting to take off.
Philip Wyatt, Economist; Sundeep Gantori, Analyst; Kathy Li, Analyst; Valerie Chan, Analyst; Delwin Kurnia Limas, Analyst;
Adrian Zuercher, Head APAC Asset Allocation; Jon Gordon, Analyst
Asia’s economies are opening up, marking an end to the
lockdown era that defined the first half of the year.
Although some markets are further along than others—
North Asia is in the lead, South and Southeast Asia are
lagging—people across the region are now generally able
to dine out and shop. So with savings accumulated from
the months holed up at home, the conditions are ripening
for a consumption-driven recovery in 2H.
Risks remain, such as new outbreaks, US-China tensions
and US presidential elections, but we expect the reopening
story to be the key driver of markets in the months ahead.
We advise positioning in advance of this spending windfall.
Quality cyclicals—consumer discretionary, information
technology, communication services—should perform well.
We see further upside in China despite the strong rally, but
expect gains going forward to be more in line with
regional equities. Singapore and India are our preferred
equity markets.
We’re upbeat on risk overall, in the region and globally,
and recommend investors to see the second half with a
glass-half-full lens. After all, policy is supportive, earnings
are recovering and virus containment in Asia is advancing.
Investing in Asia Pacific
Three steps to recovery
Asia's revival has not been synchronized. Mainland China is
clearly ahead with Taiwan and Korea close behind. ASEAN
and India's recoveries have lagged due to greater
challenges in containing the virus and less fiscal headroom,
and as the IT-driven upturn this year has mostly bypassed
these markets.
The regional recovery should follow three steps:
1. Monetary and fiscal easing to protect incomes,
employment and credit markets.
2. Easing of restrictions that allow people to return to
work, dine out and visit shops.
3. A broad lift in confidence that underpins a recovery in
trade, business sentiment and retail sales.
The first two steps happened in 2Q, and we expect the
third to become more evident in 3Q. China’s exports have
held up better than expected, and the recovery in trade
should broaden out to other markets in the region in 2H as
the global economy continues to open up.
“ With savings accumulated
from the months holed up at
home, the conditions are
ripening for a consumption-
driven recovery in 2H.”
UBS CIO GWM August 2020 7
Investing in Asia Pacific
China surprises positively, ASEAN to join the
recovery
China’s economy appears to have staged an impressive
comeback since mid-March, with 2Q GDP returning to
growth (+3.2% y/y) after a historic slump in 1Q (–6.8% y/y).
Production-related activity, such as industrial production and
investment, picked up first. Consumption and retail/travel-
related sectors are still lagging, though they’re catching up
as lockdown measures ease. We believe the trend will
continue, affirming our view for a V-shaped recovery and a
more visible rebound to 5%–6% y/y growth in 2H driven by
policy support and the global recovery.
ASEAN and India are behind mainland China, Taiwan and
Korea in controlling the virus and the economic recovery that
follows. It will take a few months to go from lifting restrictions
to normal mobility due to lags in transport re-opening, weak
confidence, second waves, etc. But as ASEAN and India
further loosen restrictions from 3Q onward, sentiment should
improve and consumption should rebound.
ASEAN to return from deeper dip in 2H
Economy Activity Index (z-score)
1
0
-1
-2
-3
-4
2013 2014 2015 2016 2017 2018 2019
ASEAN Korea & Taiwan
China
Source: CEIC, UBS, as of July 2020
Navigating US elections
The US presidential election in November is a key risk on
the horizon. Regardless of who wins the White House, a
strategy of China containment looks set to continue,
driven not so much by protectionism but by national
security considerations. Investors should be positioned
for a future of increasing structural decoupling between
the two economies.
UBS CIO GWM August 2020 8
Regional policy to remain easy
China’s strong 2Q recovery will not reverse the overall
policy easing stance for 2H, in our view, given the uneven
nature of the recovery, second wave risks and US-China
tensions. In China, we see an extra 100–300bps of reserve
requirement cuts and 10–40bps of medium-term lending
facility cuts by year-end as well as other targeted support
for SMEs.
Malaysia, Indonesia and the Philippines cut policy rates
again this month and Indonesia rolled out a bolder central
bank government bond purchase program. We see
incremental easing continuing through 2H. This backdrop
gives us the confidence to stay risk-on, as we anticipate a
broadening out of the stock recovery from just tech to
include quality cyclicals like consumer discretionary.
“ We’re upbeat on risk overall -
Jun
policy is supportive, earnings
are recovering and virus
containment in Asia is
advancing.”
May
2020
Furthermore, a Biden presidency’s greener agenda would
favor environmentally friendly cars, where Japanese
producers and Asian battery and equipment providers are
world leading. Chinese solar companies should benefit
from the US quest for carbon neutrality by 2050. Asia ex-
Japan ESG leaders should also see added momentum, as
should our China smart infrastructure theme.
 Investing in Asia Pacific

Focus on quality cyclicals

Last month marked a milestone for the region: in June,
Asia became the first region globally where quality cyclicals
represent more than half of the overall benchmark index.
While the US market is not far away, the greater focus on
quality cyclicals puts the region in a superior position given
that growth will be increasingly driven by structural drivers.
We expect Asia ex-Japan (AxJ) earnings to decline by 0.8%
in 2020 and to rebound strongly by 18% in 2021. Quality
cyclicals, in contrast, are forecast to post resilient earnings
growth of 8.8% in 2020 and an even more robust 26.1%
in 2021. IT and communication services have led this year
due to stay-at-home trends, but we expect consumer
discretionary to take the helm next year and record 35%
earnings growth thanks to easing mobility restrictions. In
comparison, we expect the earnings of the other sectors in
the region to shrink 5.1% in 2020 and grow only 14.5% in
2021, thus lagging the overall region.
While the growth dynamics clearly favor quality cyclicals, it
is worth highlighting that they are not cheap; AxJ quality
cyclicals trade at a 40% premium to the region (17.6x
2021 P/E vs. AxJ’s 10.5x). However, we believe the
valuations are reasonable given superior growth prospects.
Hence, we continue to see a favorable risk-reward for this
segment.
The strategy of holding quality cyclicals should work for
investors seeking growth and long-term secular business
models. China and Taiwan offer the highest exposure to
quality cyclicals, whereas ASEAN's shift to the new
economy is only now starting to take off.
Meanwhile, we see tactical opportunities in areas that are
expected to benefit from potential easing of mobility
restrictions. Singapore and India, our most preferred
markets, offer large exposure to the sectors positioned to
benefit for reopening and are supported by relatively
attractive valuations.

Asia ex-Japan leads the global race for quality Premium valuations justified for Asia ex-Japan’s
cyclicals quality cyclicals
Combined weight of IT, consumer discretionary and communication services in P/E for 2021 estimated EPS
benchmark indices

60% 20

18
50%
16
40%
14

30% 12

10
20%
8
10%
6

0% 4
Asia ex-Japan US Eurozone JP Global
2
Jun-15 Dec-19
0
Jun-20 Quality cyclicals Rest of the market Asia ex Japan

Source: Bloomberg, Factset, UBS, as of July 2020 Source: Bloomberg, Factset, UBS, as of July 2020

UBS CIO GWM August 2020 9

Investing in Asia Pacific

Other opportunities in Asia

Within credit, China property remains our preferred

exposure in high yield. We like good-quality BB rated
bonds that have sold off, as well as shorter-dated bonds.
The spreads in the BBB rated investment grade segment
appear wide compared to historical levels. We see
particular value in state-owned names.

In FX, the Fed’s ultra-accommodative policy stance should

weigh on the USD and set up a conducive environment for “ We still like gold from a
select yield-carry strategies in Asia. The high-yielding INR, diversification angle.”
which has underperformed year-to-date, has room to
rebound over the medium term. Also, we’re positioned for
an ongoing lift in growth by being long the KRW and JPY
versus the TWD. Separately, we’re long the JPY versus the
USD.

We shifted commodities to most preferred as conditions

set for tighter market balances, not just in industrial metals
but also in crude oil. We still like gold from a diversification
angle.

UBS CIO GWM August 2020 10

 Investing in Asia Pacific

Tactical views
Asset allocation
Equities
Japanese equities
Bonds
Currencies
Commodities

UBS CIO GWM August 2020 11

Investing in Asia Pacific

Tactical view

Asset allocation
Adrian Zuercher, Head APAC Asset Allocation
Crystal Zhao, Strategist

Current positions and changes

Asia ex-Japan equities most preferred

Asian IG bonds most preferred

Singapore and India most preferred, while Hong

Kong, Malaysia and Thailand least preferred

Asia investment thesis

• We continue to like Asian equities, as macro

fundamentals in the region further improve on a
sequential basis. Asia ex-Japan is up 40% since the
trough in late March, making near-term consolidation a
possibility. But the strong credit impulse and M1 growth
offer support for valuations at this initial stage of
recovery.

• In fixed income, we like Asian investment grade Earnings revision and PMI are moving in the right
bonds. The credit rating migration trend has stabilized, direction
and we believe the fallen angel risk is manageable amid Fundamental is catching up with valuation
strong fiscal and monetary support. Asia’s IG valuation 0.6 60
remains attractive, with spreads around the 75th
percentile. 0.4
55

• In equities, we like Singapore and India for their 0.2

50
value and quality. Second virus wave concerns globally
0.0
have put a pause on the style rotation, and growth
45
sectors have led the rally again. But we expect value
-0.2
markets (Singapore) to recover once such concerns
40
abate. Current positioning in growth sectors has become -0.4
very crowded. That said, we see less upside for Hong
Kong, Malaysia and Thailand. New daily confirmed cases 35
-0.6
in Hong Kong have bounced close to the March/April
high with more local transmission, putting its -0.8 30
2010 2012 2014 2016 2018 2020
consumption recovery under question as consumer
sentiment cools down again. Thailand continues to suffer Earnings revision breadth (4wma) for MSCI Asia ex-Japan (LHS)
from the standstill in international travel and weak Global manufacturing PMI (RHS)
exports. And Malaysia’s earnings momentum is still Source: Datastream, Bloomberg, UBS, as of July 2020
trailing the region's average.

UBS CIO GWM August 2020 12

 Investing in Asia Pacific

Tactical view

Asia ex-Japan equities

Sundeep Gantori, Analyst
Delwin Kurnia Limas, Analyst

Key trends

• Broad-based growth expected in 2021. After a likely

0.8% contraction in earnings this year, we expect 18.0% Related reports
growth for Asia ex-Japan companies next year. India will • ASEAN's New Economy, 13 July 2020
likely lead the recovery next year, with a strong 28% • Enabling a smart China: Intelligent infrastructure,
bottom-line growth. We also expect other markets to 16 June 2020
show robust growth. North Asian markets will likely see • What do the latest restrictions on Huawei mean
a 19% rise in earnings next year, and ASEAN 16%. for its supply chain?, 18 May 2020
• FAQs from APAC investors, 11 May 2020
• Quality cyclicals to maintain the growth lead. • US-China tensions weigh on markets, 4 May 2020
Quality cyclical sectors such as IT, communication Some reports may not be available for US clients.
services and consumer discretionary will likely see their
earnings grow by 26.1% in 2021, after a projected 8.8%
rise in 2020, supported by resilient top-line growth and
margin expansion. We expect these quality cyclicals to
maintain their growth dominance versus other sectors,
which are only likely to grow by 14.5% in 2021, after a
5.1% contraction this year.

• Barbell portfolio of select laggards and quality

cyclicals continues to offer attractive risk-reward. We expect all markets to see double-digit growth
While select laggards will continue to benefit from easing next year
restrictions in the near term, we prefer a diversified CIO earnings growth forecast
exposure with quality cyclical names. Leaders from these
40%
industries will likely continue to benefit from above-region
30%
growth, supported by their scale dominance.
20%

Key investment ideas 10%

0%
Quality cyclicals: With a likely continued growth
-10%
dominance next year, we maintain our preference for
leaders in quality cyclicals (IT, communication services -20%

and consumer discretionary). -30%

-40%
Select laggards: We see tactical opportunities in
Korea

Singapore
Taiwan
China

Malaysia

Indonesia
India

Asia ex-Japan
Hong Kong

Philippines
Thailand

companies with beaten-down valuations which are

positioned to benefit from easing restrictions. These
include companies in industrials, financials, and staples.
2020
Structural themes such as China's intelligent 2021
infrastructure and ASEAN's new economy will likely get Source: Bloomberg, Factset, UBS, as of July 2020
a secular boost from the COVID-19 pandemic.

UBS CIO GWM August 2020 13

Investing in Asia Pacific

Tactical view

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

Key trends

• Corporate earnings are recovering. In the March

2020 quarter, Japanese companies lost 93% of their net
profit from the previous quarter. We expect earnings to
start recovering from the June quarter into next year.
• Investors already looking to next year and seeking
oversold stocks. With our expectation of 68% net
profit recovery in the second half of this fiscal year,
investors are seeking cyclical stocks that would benefit
demand recovery.
Related reports
• Japan's new mobility - Earnings drop likely short
and sharp, 7 May 2020
• Upside limited for next six months, 29 May 2020
• Four strategies to navigate the market, 25 June 2020
Some reports may not be available for US clients.

Key investment ideas Japanese equities is driven by valuation expansion

High-quality retail companies. After the re-opening of top 10% stocks
of the economy, we think strong players will get even TOPIX500 P/BV ratio

stronger. Japanese consumer companies are offering 3.0

online promotions and opening real stores.
2.5

Avoid overvalued stocks. As liquidity in the

2.0
market has boosted large-cap stocks, we think some
top performers are over-valued. We prefer Japanese 1.5
auto firms, as they have stronger balance sheets and
are leaders in HV/EV technology. 1.0

More digital transformation is needed. As more 0.5

Jan-19
Jul-13

Aug-15

Apr-16

Sep-17
Dec-16

May-18

Jun-20
Nov-12

Oct-19
Mar-14

Nov-14

office workers need to work from home,

conferences and many business processes will likely
be moved online. This offers opportunities for TOP50 mkt cap
Japanese software companies. TOPIX500 450 mkt cap P/BV ratio

Source: Bloomberg, UBS., as of July 2020

UBS CIO GWM August 2020 14

 Investing in Asia Pacific

Tactical view

Bonds
Timothy Tay, Head APAC Credit
Devinda Paranathanthri, Analyst

Key trends

• Supply back in the market. Primary market activity has

been picking up, with total issuance rising from USD 24bn
in May to USD 35bn in June. More importantly, HY
issuance more than doubled from USD 2.4bn in May to
USD 6.7bn in June. This is encouraging, particularly for the
lower-rated issuers to term out their debt maturities.
Related reports
• Asia HY: Go for the yield, 11 June 2020
Some reports may not be available for US clients.

• Rating actions to stabilize. Negative rating actions

continued in June, led by the India sovereign downgrade.
We expect fewer negative rating actions in the coming
months, as rating agencies have completed their initial
reviews of the coronavirus's impact. We maintain our IG and HY spreads still look wide vs. recent history
default forecast at 4–5% for 2020. Spreads in bps

500 1100
• Spreads to tighten. We expect spreads to continue 450
1000
tightening in the coming months, driven by the laggards.
400
Our year-end target for IG is 220bps (vs. 253bps now) and 900
for HY is 650bps (vs. 735bps now). 350
800
300
Key investment ideas 250 700

200
China property remains our preferred exposure in 600

HY. Focus on good quality BB rated bonds that have 150

500
sold off, as well as shorter-dated bonds. May and 100
June sales have been better than the market’s toned 50
400
down expectations. Onshore and offshore bond
0 300
markets are now open for developers. Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

BBB bonds in IG: The spreads in the BBB segment JACI IG spread (LHS, bps)

appear wide compared to historical levels. We JACI HY spread (RHS, bps)

believe there is value, particularly in state-owned Source: Bloomberg, UBS, as of 5 July 2020
names.

UBS CIO GWM August 2020 15

Investing in Asia Pacific

Tactical view

Currencies
Dominic Schnider, Head Commodities and APAC FX
Teck Leng Tan, Analyst

Key trends

• APAC currencies’ appreciation has slowed since

mid-June amid fears a second virus wave could stall the Related reports
global growth recovery. An increase in virus infections is • Long INR vs. USD: Yield carry with catch-up
likely as economies reopen, but any rise should be potential, 3 July 2020
mitigated by social control measures. So we expect the
global growth recovery is to stay on track and keep
APAC currencies on an appreciation path.

• Broad USD weakness remains the dominant

medium-term driver. The Federal Reserve has clearly
signaled that monetary policy will remain highly
accommodative for the coming years. This should keep
the USD under pressure and underpin a global growth
recovery, which bodes well for the trade-oriented APAC
region.

Key investment ideas

Yield carry with catch-up potential – Long INR
versus USD. We expect the Fed’s ultra-
Asia-Pacific currencies’ performance (versus the USD)
accommodative policy stance to weigh on the USD year-to-date
and set up a conducive environment for select yield- In %

carry strategies. The high-yielding INR, which has 3%

underperformed year-to-date, has room to rebound
2%
over the medium term.
1%
Position for growth rebound – Long KRW and
0%
JPY versus TWD. The KRW should outperform
when economic growth rebounds, given its highly -1%
pro-cyclical nature. The JPY, besides being
-2%
attractively valued, serves as a hedge against
potential risk-off sentiment. The TWD should lag the -3%
KRW in a growth rebound, and is an attractive
-4%
financing currency due to its low yield.
-5%
Short USD versus JPY. We expect broad USD
weakness and JPY appreciation. With the USD -6%
JPY

CNY

MYR
AUD

NZD

IDR

INR
PHP

SGD

Average
KRW

THB
TWD

having lost much of its yield advantage, we see room

for USDJPY to drift lower in the coming months. The
JPY is also a valuable addition to investors’ portfolios, Source: Bloomberg, UBS, as of 13 July 2020
given its safe-haven quality during market selloffs.

UBS CIO GWM August 2020 16

 Investing in Asia Pacific

Tactical view

Commodities
Dominic Schnider, Head Commodities and APAC FX
Giovanni Staunovo, Analyst
Wayne Gordon, Analyst

Key trends

• We hold a low-teen return stance on commodities

over the next 12 months. Related reports
• Gold: Lifting the gold forecast, 2 July 2020
• Cyclical commodities such as energy and base • Base metals: Riding the growth recovery,
metals should drive the overall performance, 29 June 2020
benefiting from the broadening economic recovery.
Agriculture and livestock prices, overall, should stay
largely stable or move higher.

• On a more granular level, we like to be long gold,

base metals and livestock. Oil, precious metals and
select base metals can be used for volatility-selling
strategies.

Key investment ideas

Gold has been the best-performing asset this
year in US dollar terms. A number of uncertainties Market balances to tighten into 2021
make us increasingly convinced that the gold price Values in % of annual demand

can keep rising. We expect the yellow metal to trade 8%

at USD 1,900/oz in 2H20. Risks such as new waves
6%
of COVID-19, further policy tweaks by the Fed, and
rising tensions between the US and China underpin 4%
our view. Hence, we remain long gold and continue
to see it as a valuable insurance asset. 2%

0%
Better-than-expected macroeconomic data
across the globe and ongoing production -2%
challenges have tightened market balances and
supported base metal prices since late March. -4%
With a rather firm economic bounce likely in 2H20,
-6%
albeit from very depressed levels in 1H20, conditions
are set for tighter market balances, not just in the -8%
metals but also in crude oil, and higher prices ahead, Aluminum Copper Nickel Zinc Lead

in our view. We recommend investors to take on 2018 2019

broad base metal exposure via second generation 2020E 2021E
commodity indexes. Also, we continue to see value
Source: Wood Mackenzie, UBS, as of July 2020
in selling the downside price risks in nickel.

UBS CIO GWM August 2020 17

Investing in Asia Pacific

Asset class preferences

As of 17 July 2020

Least preferred Neutral Most preferred

Liquidity
Global equities
Equities total
United States
Eurozone
Switzerland
Emerging markets
Japan
United Kingdom
Asian equities
Asia ex-Japan equities
China
Hong Kong
India
Indonesia
South Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
Bonds
Bonds total
High grade bonds
High yield bonds
Investment grade bonds
Emerging market bonds
Asian investment grade bonds (USD)
Asian high yield bonds (USD)
Commodities
Commodities total
Oil
Gold
Foreign exchange
USD
EUR
JPY
GBP
CHF
Note: 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:
Investment Strategy Guide.
Source: UBS

UBS CIO GWM August 2020 18

 Investing in Asia Pacific

UBS APAC forecasts

APAC economic forecasts
% change y/y

GDP CPI

2018 2019 2020E 2021E 2018 2019 2020E 2021E

Australia 2.8 1.8 –4.2 3.0 1.9 1.6 0.3 1.0

New Zealand 3.2 2.3 –9.3 7.8 1.6 1.6 1.1 0.8

China 6.7 6.1 1.5 7.5 2.1 2.9 2.4 1.9

Vietnam 7.1 7.0 2.0 7.1 3.5 2.8 3.2 2.8

Indonesia 5.2 5.0 –3.0 4.5 3.3 2.8 2.6 2.9

Malaysia 4.8 4.3 –5.5 5.2 1.0 0.7 –1.6 0.9

Philippines 6.3 6.0 –10.2 8.0 5.2 2.5 2.3 2.5

Thailand 4.2 2.4 –5.1 6.0 1.1 0.7 –2.1 0.2

South Korea 2.7 2.0 –2.0 4.8 1.5 0.4 0.7 1.4

Taiwan 2.6 2.7 –1.4 3.6 1.3 0.6 1.5 1.3

India 6.1 4.2 –5.8 7.3 3.4 4.8 3.8 4.1

Singapore 3.4 0.7 –7.3 7.0 0.4 0.6 –0.5 1.0

Hong Kong 3.0 –1.2 –6.8 4.9 2.4 2.9 0.3 0.9

Japan 0.3 0.7 –5.8 2.8 1.0 0.5 –0.1 –0.2

Asia ex-Japan 6.0 5.1 –1.4 6.9 2.4 3.0 2.4 2.4

APAC 5.3 4.6 –1.9 6.5 2.3 2.7 2.1 2.1

Source: UBS, as of 15 July 2020

UBS CIO GWM August 2020 19

Investing in Asia Pacific

UBS APAC forecasts

APAC currencies versus the USD
We expect APAC currencies to strengthen gradually versus the greenback

13-Jul-20 Sep-20 Dec-20 Mar-21 Jun-21

USDCNY 7.00 6.80 6.80 6.70 6.70

USDINR 75.1 77.0 75.0 73.0 73.0

USDIDR 14,445 14,600 14,400 14,200 14,000

USDKRW 1,201 1,180 1,160 1,140 1,140

USDMYR 4.26 4.35 4.25 4.20 4.20

USDPHP 49.4 50.5 50.5 50.5 50.5

USDSGD 1.39 1.40 1.39 1.38 1.38

USDTWD 29.5 30.0 29.8 29.6 29.4

USDTHB 31.3 32.5 32.5 32.0 32.0

AUDUSD 0.70 0.70 0.71 0.72 0.73

NZDUSD 0.66 0.62 0.64 0.66 0.67

USDJPY 107 104 104 104 104

Source: Bloomberg, UBS, as of 13 July 2020

UBS CIO GWM August 2020 20

 Investing in Asia Pacific

Investment spotlight

Asian high yield bonds and

long Indian rupee
Current valuations for the INR remain attractive as India’s idiosyncratic risks
relating to virus containment, its rating downgrade, and its current account deficit
have been priced in.

Carl Berrisford, Analyst

Asia high yield bonds offer an attractive yield spread of
about 735bps, which is historically elevated. We expect it
to tighten further, driven by the global cyclical recovery as
economies continue to gradually re-open and the rally
broadens to lower-rated, more cyclical segments. We
foresee the spread tightening to 650bps by December
2020. Global monetary and fiscal policy support has helped
to ensure liquidity issues do not become solvency issues for
companies that were viable before the crisis. In particular,
the Fed's pledge of unlimited quantitative easing (QE), the
roll-out of USD swap lines and credit market programs
have eased global USD liquidity concerns and reduced the
tail-risk for credit. And while we expect default rates to
increase to 4–5% over the coming 12 months, this has
been priced in. Key stressed sectors are oil and gas and
cyclicals, as well as some of the single-B segments
comprising just 13% of the index. The core of the index
exposure is to China with an index weighting of close to
60%, where we hold a more stable view, particularly on
the Chinese property sector. We expect Asia HY to deliver
returns of around 12% in our base case over the coming
12 months.
We have become positive on the Indian rupee, which has
lagged other APAC currencies in recent months. We
recommend going long INR versus the USD, with a 7%
forecast return over the next 12months, half of which will be
yield carry and the other half spot appreciation. We think the
yield carry environment in Asia has improved with the Fed
likely to remain accommodative for some time. Current
valuations for the INR remain attractive as India’s idiosyncratic
risks relating to virus containment, its rating downgrade, and
its current account deficit have been priced in.
Historically, sharp INR depreciation has been precipitated
by high inflation and deeply negative current account
dynamics. Our outlook for the CPI is in the mid-single
digits, while the current account is expected to remain only
modestly negative in the low-single digits. Historically,
going short USDINR on large rallies has delivered positive
12-month total returns.
USDINR exchange rate, forward rate, and forecasts
We expect USDINR to drift lower toward 73 over the next 12 months

80
78
76
We have become positive on Indian 74
rupee, which has lagged other 72
APAC currencies year-to-date and 70

forecast a 7% return over 12 months. 68

66

• The INR's yield carry will likely improve as the 64

Fed is likely to remain accommodative for an 62
extended period 60
Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Jun-21
• India's CPI and current account deficit are USDINR USDINR forecast
forecast to remain modest USDINR forward rate

Source: Bloomberg, UBS, as of July 2020

UBS CIO GWM August 2020 21

Investing in Asia Pacific

Emerging Market Investments

Investors 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
registration 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, Emerging Market Bonds: Understanding Emerging
Market Bonds, 12 August 2009 and Emerging Markets 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 tolerance and who seek to hold higher yielding
bonds for shorter periods only.

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UBS CIO GWM August 2020 22

 Investing in Asia Pacific

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UBS CIO GWM August 2020 23

Investing in Asia Pacific

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UBS CIO GWM August 2020 24

 Investing in Asia Pacific

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UBS CIO GWM August 2020 25