UBS said it was largely neutral on broader emerging market (EM) equities amid increased political volatility and limited upside potential from higher U.S. interest rates.
But the brokerage said it favored EM tech stocks, stating that the sector had largely outpaced its EM peers in recent months, with sectors tied to artificial intelligence set to benefit 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.
Chipmaking stocks in Taiwan and South Korea, namely TSMC (NYSE:TSM) and SK Hynix Inc (KS:000660), saw a massive bump in valuation over the past year as they flagged increased demand from AI.
From a geographical perspective, UBS said it preferred China and South Korea. Chinese markets in particular are expected to benefit from policy tailwinds, especially as Beijing moves to stabilize the property sector and shore up economic activity.
“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 wrote.
China’s benchmark Shanghai Shenzhen CSI 300 and Shanghai Composite indexes saw a stellar recovery between February and May, amid optimism over stimulus support from Beijing. But this rally largely petered out in June, with Chinese stocks seeing fresh weakness in recent sessions on concerns over a trade war with the European Union.
