UBS has upgraded Thailand's equity market to overweight from neutral, saying the peak impact of policy-driven factors behind the sell-off and the specific challenges for companies have passed.
Parts of Southeast Asia were hit over the last few months due to various macro and idiosyncratic factors, according to UBS. Malaysia, the Philippines and Thailand are testing pandemic lows in terms of valuations, the Switzerland-based investment bank said in a recent research note.
While UBS has been positive on Malaysia and the Philippines, the bank believes Thailand now provides an opportunity to go overweight.
"The market has been one of the worst performers over the last few months. We believe there were a series of top-down and company-specific idiosyncratic factors that dragged the market," UBS said.
While some worries still linger, many of these have probably passed their peak for markets, while overall valuations have now become quite compelling, moving down close to Covid-trough levels, said the firm.
"Political and policy uncertainties have largely passed, alongside company-specific concerns on large caps. UBS's Thailand team sees a turnaround in company-specific drags, making the market's outlook the most optimistic in five years," noted the research.
UBS is bullish on the Thai financial sector as its financial analyst expects credit costs to fall to 137 basis points (bps) this year, from 149 bps in 2024.
UBS-covered Thai banks have already set aside sufficient provisions for re-entry of non-performing loans, allowing them to write off or sell them without additional provision burdens.
Meanwhile, Thailand has a fairly small trade surplus with the US, ranking 10th among US trading partners, and the share of direct US revenues in the top line of MSCI Thailand is minimal.
"However, if President Donald Trump's proposal to impose 'reciprocal' tariffs is implemented, Thailand is among the economies most at risk given the current imbalances in tariffs," said UBS.
The bank maintains an overweight stance on China, citing resilient corporate fundamentals, potential inflows from retail investors, and continued policy support, particularly in artificial intelligence-related sectors.
China's gradual recovery is a positive sign, with better property sales than expected, stabilisation in tier-1 and tier-2 cities, and faster local government debt repayments, noted UBS. Policy shifts towards domestic consumption should also support Chinese equities.
India remains underweight as valuations remain high despite recent underperformance, while corporate earnings have been lacklustre. Notably, retail equity mutual fund flows in India dropped to a 10-month low in February, according to the bank.
UBS expects emerging markets (EM) to outperform over the next 1-3 months amidst waning US exceptionalism, which could drive market consolidation.
"The US economy is showing signs of slowing down, which have yet to be reflected in earnings expectations," the research noted.
UBS believes the outlook for EM and Asian equities remains tough, given slowing global growth and rising tariff risks, as well as the implications of other US policies.
While EM valuations appear attractive relative to developed markets, this is largely reflective of the latter's superior and improved returns on equity, noted the bank.
"Excluding China, EM equities are not cheap, with current valuations near the historical ex-Covid peak," UBS said.