Investing.com – UBS said it is broadly neutral on emerging market (EM) stocks amid increased political volatility and limited upside from higher U.S. interest rates.
But the brokerage said it favored emerging market technology shares, saying the sector had significantly outperformed its emerging market peers in recent months, with artificial intelligence-related sectors benefiting the most.
“We continue to believe key AI suppliers and memory chip makers in Taiwan and South Korea will benefit from a combination of recovering global technology orders and overall AI-related tailwinds,” UBS analysts wrote in a recent note.
Stocks of chipmakers in Taiwan and South Korea, namely TSMC (NYSE:) and SK Hyniks Inc. (KS:), have seen a sharp jump in value over the past year as they noted increased demand from AI.
Geographically, UBS said it favors China and South Korea. Chinese markets in particular are expected to benefit from policy tailwinds, especially as Beijing tries to stabilize the property sector and support economic activity.
“Earnings revision trends have also turned positive recently, and we believe this trend could continue if the recovery in Chinese consumption continues. Key risks to monitor include:
US-China tensions and currency volatility,” UBS analysts wrote.
China’s indices posted a stellar recovery between February and May amid optimism about stimulus support from Beijing. But that rally largely ended in June, when Chinese stocks fell again in recent sessions on concerns about a trade war with the European Union.
South Korea will benefit from improved export activity, especially in the technology sector, while local manufacturing activity improved in May.