UBS-APAC-Outlook 2025 Bracing for uncertainty

Investment Rating - The report assigns an "Underweight" rating to Taiwan and India, while maintaining an "Overweight" rating for China and a "Neutral" rating for Korea and Brazil [7][52]. Core Insights - The report anticipates that MSCI EM returns are likely to turn negative in 2025 due to slowing global growth, risks from US policy changes, and a stronger dollar impacting emerging markets [2]. - Earnings growth for MSCI EM is heavily reliant on the tech sector, with expectations of an 11% EPS CAGR over the next two years, primarily driven by TSMC and other tech companies [17][19]. - The report highlights that while valuations in emerging markets are not inexpensive, they are reflective of improved ROEs, and the current PE ratio of 19.2x is close to pre-COVID peaks [25][27]. Summary by Sections EM & APAC Equity Strategy - The report outlines a challenging environment for emerging markets, particularly post-US elections, with expectations of an 8% downside for MSCI EM and a 1% downside for MSCI AxJ by 2025 [2][44]. - Key themes influencing EM returns include domestic GDP exposure, US import tariffs, corporate tax cuts, and climate policy [5]. Country-Specific Insights - China is viewed positively due to stable fundamentals and potential policy support, while Taiwan faces risks from high valuations and geopolitical tensions [4][52]. - India is downgraded due to expensive valuations and ordinary performance, with concerns about economic reforms following recent elections [52]. Sector Analysis - The tech sector is crucial for driving earnings growth in emerging markets, with significant contributions expected from companies like TSMC [17][19]. - Traditional drivers of semiconductor demand are showing signs of fatigue, although AI-related demand continues to support growth [21]. Valuation and Market Sentiment - Current valuations in emerging markets do not reflect the potential risks, with a target PE multiple of 17.3x indicating a need for caution [44][48]. - The report notes that global funds' EM equity holdings are at a five-year high, suggesting a potential shift in market sentiment [49][50].