UBS Neutral on EM Stocks, But Favors Tech
Chipmaking stocks in Taiwan and South Korea, namely TSMC and SK Hynix Inc, have seen a big increase in their value over the past year. This is because they are in high demand for making chips used in artificial intelligence (AI). UBS, a well-known brokerage firm, says it is neutral about the overall broader emerging market (EM) stocks since there is a lot of political uncertainty and limited potential for growth because of rising interest rates in the U.S..
However, UBS likes EM tech stocks. These stocks have done better than other EM stocks recently, with sectors connected to AI benefiting the most.
"We continue to believe key AI enablers and memory-chip makers in Taiwan and South Korea will benefit from a combination of a recovery in global tech orders and overall AI-related tailwinds," UBS analysts wrote in a recent note.
Why UBS Prefers EM Tech Stocks
Chipmaking companies in Taiwan and South Korea, such as TSMC and SK Hynix Inc, have become more valuable because there's a lot of demand for AI technologies.
From a geographical perspective, UBS says it prefers China and South Korea for investment. Chinese markets are expected to get a boost from government policies, especially when Beijing tries to stabilize the property market and boost economic activities.
"Earnings revisions trends have also turned positive recently, which we think could be maintained if China's consumption recovery broadens out. Key risks to monitor include US-China tensions and currency volatility," UBS analysts added.
Benefits for China and South Korea
China’s main stock indices saw a strong recovery from February to May because there was optimism about the Chinese government supporting the economy. However, this recovery slowed down in June due to concerns about a potential trade war with the European Union.
South Korea is expected to benefit because there is improved export activity, especially in the tech sector. In addition, local manufacturing saw improvements in May.
Key Terms Explained:
- Emerging Market (EM): Refers to economies that are in the process of becoming more advanced, usually marked by higher growth rates compared to more developed countries. Example: India, Brazil.
- Artificial Intelligence (AI): A branch of computer science dealing with the simulation of intelligent behavior in computers. Example: Siri on iPhones uses AI to provide responses.
In summary, UBS is neutral about investing in broader emerging market stocks due to political risks and rising U.S. interest rates but is positive on EM tech stocks, especially those involved in AI and based in Taiwan and South Korea. The firm also prefers investments in China and South Korea due to potential policy benefits and economic stability.
