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Asian equities (ex-Japan)
Preference: overweight

UBS View
MSCI Asia ex-Japan (27 June): 469 (last month: 466)
MSCI Asia ex-Japan (6-month target): 515

• The region continued to show high volatility last month, with its P/BV temporarily close to 2008 lows.
• Hong Kong and Singapore markets' domestic fundamentals remain solid. Hong Kong should benefit from China's gradual recovery in 2H 2012, while Singapore's economy is rebounding and corporate balance sheets and earnings remain solid. After the rate cut early June, we expect China to have more policies to support growth in 2H 2012. China is our most preferred market, while Indonesia is least preferred in the region. We are more concerned about Indonesia's fiscal deficit, since the fuel price hike did not happen. Domestic problems for Indonesia include current account deficits, potential capital outflows, bottomed-out inflation and hiccups in economic and market reforms, in our view.
• We expect 10% earnings-per-share growth over 12 months for the MSCI Asia ex-Japan, which trades on 11.6x 12-month trailing earnings. We expect this multiple to expand slightly in the next six months, as the current earnings downgrade cycle is approaching its end. Nevertheless, MSCI Asia ex-Japan is likely to see further volatility in the near term due to global macro risk factors.

Positive scenario
MSCI Asia ex-Japan (6-month target): 610
• More supportive monetary and fiscal policy, stable inflation, sustained domestic demand growth, and an improved global growth outlook should lead to a better earnings outlook. We would expect earnings growth of 15% and a P/E based on realized earnings of 14x.

Negative scenario
MSCI APAC ex-Japan (6-month target): 380
• A hard landing in China with a global recession leads to negative earnings revisions for 2012. In this scenario, earnings could fall 20% over 12 months and the P/E could fall to about 10.5x.
Note: Scenarios refer to global economic scenarios (see slide 7)

What we're watching
Growth
Why it matters
Both HK and Singapore's GDP growth disappointed, raising concerns about the growth momentum in the region. Investors should focus on whether growth will re-accelerate in the near term. Key dates: 3 July, HK retail sales; 13 July, SG retail sales; 17 July, SG exports

Policy responses
Some other countries in the region have structural issues due to fuel subsidies (e.g. Indonesia) and fiscal deficits (e.g. India). Policy responses often come on an ad hoc base.

Recommendations
Tactical (6 months)
• We prefer Hong Kong banks, Singapore high-dividend stocks and Chinese insurance and consumer plays.
• We are concerned about India's inflation pressure, but we see opportunities in the power and banking sectors.

Strategic (1 to 2 years)
• Rising consumption is the long-term trend in Asia ex-Japan that we expect will continue to play out.
• In China, sectors that contribute to improved labor productivity or deliver goods and services for the elderly should benefit from demographic changes (ageing population and decelerating population growth).

Asia ex-Japan country preferences
Current most preferred markets
China

Current least preferred markets
Indonesia

We currently have a neutral view on the remaining emerging equity markets in the MSCI Asia ex-Japan index.

UBS
For further information please contact CIO asset class specialist Patrick Ho, patrick-ww.ho@ubs.com
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Please see important disclaimer and disclosures at the end of the document.
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