UBS overweight on China stocks, questions sustainability of “narrow” EM rally

Investing.com-- UBS analysts said they remained overweight on Chinese stocks despite a recent pullback, but questioned whether a recent rally in emerging market stocks could be sustained. 

The MSCI EM stock index was trading up about 7.7% so far in 2024. But UBS noted that 78% of these gains were driven by just five stocks, primarily from the artificial intelligence/internet sectors. 

The brokerage said that EM valuations were at a heavy discount to developed markets, and that the sector was likely to see slower returns in the second half of 2024, amid headwinds from the U.S. elections, delayed interest rate cuts by the Federal Reserve and strength in the dollar.

Still, UBS expects EM markets to clock stronger earnings growth over developed markets in the next two years, with Taiwan and South Korean technology stocks set to provide the biggest support to overall earnings. 

UBS overweight on China

The brokerage said it remained overweight on China, even as the country’s stocks declined sharply from 2024 peaks hit in May. 

A main point of concern was a slowing turnaround in the property sector, despite sustained support from Beijing. Slower-than-expected growth in domestic consumption was also a concern.

But UBS said the Chinese market still had scope to outperform on more government policy support, while earnings growth now appeared to be stabilizing from COVID-era lows.

Focus in July is on the Chinese Communist Party’s Third Plenum- a meeting of top-level Chinese officials that is likely to see Beijing outline more stimulus measures.

UBS upgrades South Africa, Singapore

The brokerage said it had upgraded South Africa to Overweight from Neutral, citing easing political uncertainty following the formation of the government. UBS also sees market-friendly policies from the country, and said that South Africa was “among the cheapest markets in our universe” after largely lagging for the past few years.

UBS also upgraded Singapore to Neutral from Underweight, citing less stretched valuations and strong earnings, especially in the island state’s biggest banks.

The brokerage was bearish on Latin America, downgrading Brazil to Neutral and Mexico to Underweight.