Strategy

UBS Gives Its Top Picks For Asian Stocks in 2012

Tara Loader Wilkinson, Asia Editor, 12 December 2011

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This year has been
characterized by market volatility so fierce it has made the financial crisis
of 2008 and 2009 seem like a mere prelude. Although investors were keen for
exposure to Asia’s fast growth story, Asian equities have had a rollercoaster
ride.

The uncertainty inspired a rabbit-in-the headlights sentiment in many. Unable to make a call, a
flight from riskier products and equities has ensued with many investors liquidating equity allocations in favour of safer cash or gold. The question on
every investor’s lips is now: what will 2012 hold in store and where can I find low-risk high yield?

In its recent report 'Asia Outlook 2012: An Oasis In The Desert' senior
analysts at UBS Wealth Management Research reveal eight of their favourite tips for Asian investors next year.

1: Asian financials sensitive to interest rates

“The share
prices of Asia ex-Japan banks and insurance companies are sensitive to interest
rates and domestic growth. In the last two years, valuations of both sectors
have been derated due to rising interest rates, macro concerns and regulatory
issues even though their earnings have rebounded since the global financial
crisis. If both sectors achieve the consensus earnings growth expectations
around the low teens, they could benefit from a rerating, particularly the
Chinese banks and life insurers, the Korean insurers, and the Indonesian and
Singaporean banks.” –Patrick Ho

2. Asian currencies to moderately appreciate

“Asian
monetary authorities are likely to allow only modest currency appreciation amid
a moderate global outlook in 2012. We continue to favor the CNY for its
stability, the SGD for its long-term uptrend, the IDR for its high coupon
yield, and the KRW for its catch-up potential. Investors can profit from a
moderate Asian currency appreciation in two ways. First, they can take
advantage of the elevated foreign exchange volatility, either by selling
volatility and collecting attractive option premiums via Dual Currency
Investments (DCI), or by trading price fluctuations. Second, investors can pick
up yield in local currency bonds in CNH, SGD and IDR. The weak CNH appreciation
expectations have pushed up CNH bond yields and we prefer Chinese state-owned
enterprises or quality global corporates. SGD bonds are more defensive despite
their low yields, and we prefer bank bonds and government-linked issuers. IDR
bonds offer some of the highest yields in Asia but we expect Indonesia's strong
economic growth and moderating inflation to support the currency and IDR bonds.”
-Teck Leng Tan, Lili Fan and Lucinda Zhou

3: Domestic consumption and energy high-yield credits

“Policy easing
has provided opportunities for select Asian high-yield credits that had
suffered from general credit tightening in 2H11. In China, the central bank has
signaled targeted credit loosening in sectors including SMEs, services, and
some industrials. Across Asia, we see promise in select credits in retail,
services, telecom, and textiles, as well as some cyclical credits in energy,
machinery, and materials. We remain cautious on Chinese property credits as we
expect policy curbs in this segment to continue for an extended period." - Lili Fan and
Lucinda Zhou

4: Beneficiaries of policy support

"China will
likely focus on the key policy areas in its 12th Five Year Plan while India and
Indonesia will likely focus on deregulation to encourage greater private
investment. In China, we expect the focus areas to be domestic consumption,
agricultural infrastructure, energy efficiency and manufacturing industry
upgrade. Furthermore, we like wireless telecom stocks as we believe government
policy has given enormous support to W-CDMA wireless services. In India, our
preferred sectors to play policy support include materials stocks where we
expect infrastructure projects to accelerate with deregulation. In Indonesia,
we prefer toll road stocks as the land acquisition bill, which we expect to
pass, should facilitate the expansion of the sector. Elsewhere in the region,
we favor the Thai property and auto-financing sectors due to government
subsidies to first-time home and car buyers." - Carl
Berrisford and Hartmut Issel

5: China clean energy

“We are
positive on China's clean energy sector given five tailwinds for 2012: lower
inflation which offers room for price hikes; policy support based on the 12th
FYP; growth visibility on the back of the policy-driven supply push; higher
utilization rates due to stricter approvals on new coal power capacity; and
potential monetary easing through rate cuts which should help reduce the
interest expense of highly geared power operators. Overall, we expect gas
producers and distributors to be the key beneficiaries. For solar, we prefer
the leading upstream players, while we remain cautious on nuclear due to safety
concerns and wind due to grid connection issues.” - Glenda Yu

6: Japan recovery ahead of developed market peers

“The Japanese
economy is poised for a recovery in 2012. In addition to post- earthquake
private investment recovery, the JPY 12 trillion supplementary budget
supporting reconstruction should bring GDP growth to nearly three per cent, the highest
among advanced economies. With the rebuilding demand expected in 2012 and the
market's historically low valuations, Japanese equities are in a unique
position for the first time in five years. We expect corpo- rate earnings to
grow 10-15 per cent in FY2012 mainly due to recovery from the earthquake and the Thai flood damages. We prefer the auto
sector as we expect a moderately weaker Japanese yen and a strong production
recovery next year. We also prefer stocks that could take advantage of Japan's
lower nuclear energy usage in the medium term." - Toru Ibayashi
and Kazuhiko Ogata

7: Asian
winners from EU woes

“We expect
Europe ex-UK banks to shrink their balance sheets and credit lines in order to
meet the capital ratio requirement of the recent EU debt deal. In such a
scenario, domestic banks and strong UK banks in the financial centers of Hong
Kong and Singapore could gain market share and enjoy higher credit spreads.
Some of the UK banks, as well as Hong Kong and Singapore banks which generally
have healthy liquidity and capital positions, have expressed willingness to pursue
long-term market opportunities in the event of an orderly credit withdrawal by
the European banks. With their strong Asian footprints, the UK and Singaporean
banks in particular could take market share from the Europe ex-UK banks in the
region.” - Patrick Ho and Chin Keong Tan

8: Thermal coal hard-landing concerns overblown?

“The discrepancy in performance between coal stocks and coal
spot prices implies market expectations of a pronounced coal price weakness
based on fears of a hard landing in China. Our estimate is for 8 per cent
growth, not a hard landing. The long-term story is the rise of Asian coal in
India and Indonesia over the next decade (and China to a smaller degree; see
Investment theme 5). We estimate that the share of coal in Asia's total energy
production would rise slightly to 63 per cent in 2020. While India has large
coal reserves, production growth is a mere 4-5 per cent yearly. As such,
producers are turning to Australia and Indonesia. We encourage stocking up on
some of the thermal coal names from these countries for the winter.” - Hartmut Issel

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