UBS forecasts flattish returns from emerging markets in first half of 2024

Swiss brokerage underweight on "expensive" India

Swiss brokerage UBS believes that emerging markets (EMs) and Asian equities could deliver flattish returns during the first half of calendar 2024 (H1 of 2024) as upside from the tech cycle may be offset by a US slowdown.

“UBS economists’ baseline view is a recession in the US during 2024, albeit mild, resulting in muted developed market (DM) equity returns. When we look at EM returns’ historical sensitivity to DM equities, EM is unlikely to be immune to DM weakness. But as the Fed starts to cut rates and the tech upcycle continues, we see scope for better returns into the back half of 2024,” said a note by UBS.

It has set a 2024 year-end target for the MSCI EM of 1,020 and 650 for MSCI Asia ex Japan — implying just single-digit upside from the current levels. UBS expects slightly lower upside for US equities (S&P500).

“As EM equities tend to benefit more than US equities when US real yields fall, we see a small outperformance in EM versus US,” the note added.

UBS is underweight on India, Saudi Arabia, Singapore and Thailand, while it is overweight on Taiwan and South Korea.

It added, “We are underweight on expensive markets such as India (retail flows could be at risk with higher rates, dent from higher oil) and Thailand.”

“Valuations are expensive versus ordinary fundamental performance of companies. The market may be ignoring risks on rural demand from El Nino, in our view. Market's base case appears to be regime continuity in next year’s general elections. With tech upcycle unfolding and potential China recovery, the safety premium on India could reverse. Retail flows could soften as bank deposits remain elevated,” UBS said.

“We also like relatively defensive markets with support from the domestic economy and inexpensive valuations (like Brazil, Malaysia, Philippines and Poland). We are neutral on China as we await meaningful policy stimulus, while low valuations limit further downside,” the note added.