UBS Wealth Says It’s Time to Bet Big on Emerging Markets Shares

(Bloomberg) -- Emerging-market stocks, particularly those in Russia and Latin America, will be the hottest items for equity investors this year. That’s the view of the wealth management arm of UBS Group AG, which oversees more than $4 trillion for its clients.

A reviving global economy helped by vaccine rollouts, reduced uncertainty around U.S. foreign policy, a weaker dollar, stronger commodities and stimulus in major markets should all align behind this theme.

In response, UBS Wealth Management has shifted its preference in equities to developing countries, which are more sensitive to global growth and are cheaper than developed markets. MSCI Inc.’s emerging-market index trades at 16 times expected earnings in the next 12 months, well below a P/E ratio of 22 times for the S&P 500 and less than the 17 times for the Stoxx Europe 600.

“This is now a sweet spot for emerging markets,” Michael Bolliger, the unit’s chief investment officer for global emerging markets, said in an interview. “And looking at valuation, there are parts of the market where people increasingly worry about things getting expensive. EM is definitely not ticking these boxes. Particularly outside of Asia, it is lagging on the valuation side, which is another plus.”

UBS Wealth expects the MSCI Emerging Markets Index, already up almost 8% in January, to climb to 1,450 by the end of the year, further upside of about 5% from current levels. In a bull case, it could climb to 1,600, delivering gains of more than 15%.

Russia and Latin America are the pick of the regions because of their attractive combination of commodity and reflation exposure, and of value and cyclical stocks. Russia boasts the “highest dividend yields on the planet” and the ruble is poised to strengthen as oil prices could rise to $63 a barrel by year-end, according to UBS Wealth’s estimates.

In Latin America, where financials, materials and energy are important sectors, Mexico will likely face increased heat from the Biden administration regarding its human rights and labor policies, but will benefit from a more collaborative approach to immigration and higher U.S. spending. Brazil is likely to face pressure related to deforestation, but not to the extent that it derails the bilateral relationship with the U.S.

To be sure, under a scenario of increased risk aversion or a spike in U.S. yields, the asset class could become more volatile, but would remain attractive, he said.

Here are more comments from Bolliger and from UBS Wealth’s note published last week:

• Asian equity markets also look appealing, “particularly China,” where healthy domestic consumption is expected to drive strong economic and earnings growth
• Savings during the pandemic will allow consumers to spend more on goods and services, with Turkey and Thailand predicted to see tourists returning “in droves”
• Leaders in environmental, social, and corporate governance companies should benefit from the agenda shifting “toward a greener, more social, and better-governed future in emerging markets as well”
• The Turkish lira and Russian ruble have catch-up potential after lagging behind peers

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