Stick with emerging-market stocks, especially in China and AI, UBS advises
News Summary
UBS Global Research indicates that Emerging Market (EM) equities are poised for an 18% earnings per share (EPS) growth in 2025, followed by 15% in 2026 and 10% in 2027, with Artificial Intelligence (AI) playing a significant role. UBS advises investors to maintain an overweight position on Chinese stocks, citing attractive valuations, robust fund flows, and favorable macro catalysts. The report highlights that a normalizing global macro environment in 2026, including a rebound in global growth, fiscal support in developed markets, and Federal Reserve balance sheet expansion, is expected to keep long-end US yields in check, thereby easing yield headwinds for EM equities. AI remains a key driver of EM performance, supported by strong cash flows, low leverage among major spenders, and relatively appealing valuations. Companies with direct revenue exposure to AI demand constitute about 23% of the MSCI EM index, yet they accounted for over 42% of 2025 returns and nearly all EPS upgrades this year. UBS prefers Chinese consumer-facing AI companies over their Korean and Taiwanese counterparts due to more reasonable valuations and less aggressive re-rating.
Background
UBS's report comes at a time when the global economy faces a mix of challenges and opportunities. In 2025, under President Donald Trump's administration, U.S. economic policies may continue to emphasize domestic priorities and trade protectionism, while global investment in technological advancements, particularly Artificial Intelligence, continues to accelerate. Emerging markets play an increasingly vital role in the global economic system, often offering higher growth potential than developed economies but also accompanied by greater volatility and risk. Investors are generally focused on these markets' performance amidst Federal Reserve monetary policy, global trade relations, and geopolitical tensions.
In-Depth AI Insights
Does UBS's "overweight" recommendation for Chinese stocks adequately account for potential geopolitical risks from the Trump administration? - UBS mentions "easing tariff risks" as a positive signal for Chinese stocks, suggesting their analysis incorporates potential trade policy impacts from the Trump administration. However, given the unpredictable nature of Trump's policies, this "easing" might be temporary, with potential for escalation in the future. Investors need to carefully assess the long-term implications of such policy risks, especially potential restrictions on China's tech and AI industries. - UBS's recommendation might be more heavily weighted on China's internal market fundamentals and the structural growth of its AI industry, believing these factors can offset some external risks. However, this assessment doesn't explicitly detail the reliance of China's AI industry on external supply chains for critical technologies (e.g., high-end chips), which remains a significant potential vulnerability for its long-term growth. Are the "healthy" cash flows and low leverage of EM AI companies sufficient to withstand potential market volatility or technological disruption risks? - The report emphasizes EM AI companies' "solid cash flows" and "low leverage," which indeed provide financial resilience, giving them an advantage during economic downturns or tighter financing environments. This reflects either prudent financial strategies in their early development stages or the profitability of their business models. - However, the AI sector is characterized by extremely rapid technological iteration and intense competition. Even with strong financials, companies that fail to innovate continuously or adapt to new technological paradigms could still face obsolescence. Investors should delve deeper into these companies' R&D investments, technological reserves, and competitive moats in their respective niches, rather than solely relying on financial statement metrics. What is the underlying logic behind UBS's preference for Chinese consumer-facing AI companies over their Korean and Taiwanese counterparts? - UBS states that Chinese consumer-facing AI companies have more reasonable valuations and less aggressive re-rating, which is likely the direct reason for their preference. In overvalued markets, even quality assets can face correction risks. - A deeper reason might be that China's vast consumer market provides unique scale effects and data advantages for AI applications, especially in areas like internet, e-commerce, and social media. This allows Chinese companies to rapidly accumulate users and data in specific AI application scenarios, building localized advantages. In contrast, Korean and Taiwanese AI companies might focus more on hardware manufacturing or B2B solutions, with different valuation logics and growth drivers, potentially facing higher supply chain volatility risks.