ab19 January 2024Global Research and Evidence LabEM Equity StrategyJan'24 sell-off: What's changed on the screens?Putting the negative start to the year in contextThe 6.3%/7.2% decline in MSCI EM/AxJ respectively YTD, has been swifter than most previous corrections (we feature 30+ events in Fig 2), but is relatively small in magnitude - mostly because it has lasted only 3 weeks (for now). It has been localised to EM (DMs are down <1%), and EM Equities have underperformed bonds (they had become too expensive relative to bonds in recent months except China). The correction is seen not only in China (EM ex-China is down 5%), and Fx accounts for 1.5% of the underperformance in US$ terms. Since the start of the year 1) MSCI EM EPS estimates are down 0.6-0.8% (in-line with DM), 2) US$ 5.9bn of foreign money has left EMs (vs US$31bn inflows for 2023), 3) valuation discount to DM - already deeper than history - has expanded by 3-4ppts. Overall, we don't see the correction driven by significant macro concerns (as yet), though there are specific idiosyncratic factors in certain markets. We remain comfortable with our end-2024 MSCI EM/AxJ targets implying 6%/9% upside respectively, with 40% of our 13% EPS CAGR over 2024 and 2025 driven by Korea and Taiwan tech (our tech team remains confident of sharper recovery in earnings than market expectations: Report 1, Report 2). Our market preferences are laid out in Fig 1. Taiwan and China bearing the brunt of foreign sellingSome of the most intense foreign selling through the sell-off (as % of market cap) has been in Taiwan, South Africa, and Thailand (though China Northbound has also seen some money pulled out). Markets with foreign inflows include Indonesia, Brazil and Korea (even though domestic selling pressure has made this the worst performing market YTD). Most of APAC has seen earnings cuts YTD (except Philippines), while LatAm estimates have been mostly stable. Leveraging our quant strategy team's crowding scores, we observe: crowding has been stable in AxJ, but reducing in Japan, LatAm and EMEA.Which stocks now look interesting?We present a few sets of interesting stocks to position post the correction: 1) Stocks seeing earnings upgrades but correcting nevertheless (Fig 28) , 2) Dividend stocks that have corrected to peak yields (Fig 29), 3) Stocks close to trough valuations (Fig 30). On the flip side, we also highlight a set of stocks that have seen positive crowding momentum recently but now beginning to correct - historically these have been signals of vulnerability to sharp unwinding of long positions (Fig 31). This report has been prepared by UBS Securities India Private Ltd. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES, including information on the Quantitative Research Review published by UBS, begin on page 17. UBS does and seeks to do business with companies cover...
