One of the world's top wealth management firms examines the macro-economic and market outlook for the Asia-Pacific region and how it should play the situation.

Underperformance by Asia-Pacific equities during 2021 will end in 2022 as economies re-open after the long restrictions caused by the pandemic, according to UBS. 

Broad measures of equity market performance show that Asia lagged in 2021. The region fell by 1 per cent and China slumped 12 per cent this year, while the US (MSCI USA +26 per cent) and the world (MSCI AC World +19 per cent) have had a solid year. But with vaccinations rolling out, economies gradually opening up, and travel finally restarting, Asia’s underperformance is due to end in 2022, the banking group said in a note.

“Looking ahead, we are upbeat on Asia’s prospects. The headwinds that are weighing down financial markets - such as supply bottlenecks, rising energy prices, and China’s regulatory uncertainty - should ease in 2022, and rapid vaccination progress should allow economies to reopen more fully in 2022,” Min Lan Tan, head chief investment office APAC at UBS Global Wealth Management, said. “We are entering the year positive on the region’s risk assets and see opportunities in catch-up plays, quality cyclicals, and the winners of structural trends around tech disruption and the net-zero transition.” 

For banks more broadly, a big concern is whether the inflation increases of recent weeks and months are temporary or will become more embedded, bringing risks of significant interest rate rises. (Credit Suisse recently looked at this.)

Overall, UBS predicts slower but “still solid” gross domestic product growth of 5.8 per cent for Asia (vs 7.0 per cent in 2021) and 5.4 per cent for China (vs 7.6 per cent in 2021). 

The MSCI Asia ex-Japan benchmark is forecast to rise by a mid-teen percentage in 2022, thanks to attractive valuations, reopening progress, fading headwinds in China, and relatively light positioning at the moment. Notably, UBS thinks that the MSCI China Index will also climb by a mid-teen percentage.

Elsewhere, UBS said that central banks are likely to cut emergency monetary accommodation, as the economic effects of the pandemic keep subsiding. 

UBS said that investors should buy into firms which are likely to benefit from global growth; this will benefit cyclical areas such as eurozone and Japanese equities, US mid-caps, global financials, commodities, and energy stocks. It also said that investors should look for opportunities in healthcare.

The bank suggested that clients should be ready for a stronger US dollar as a combination of Fed tapering [unwinding of quantitative easing] and slowing global growth would favour the US currency relative to currencies bound to looser monetary policies, such as the euro, yen, and Swiss franc.