Global equities have done well this year on the back of expanded price-to-earnings ratios, but investors should not expect it for another year, says UOB private bank. Clients could continue to get decent returns from Asia's high-yield space.

Global equities have been staging a comeback relative to bonds this year, predicated by a bottoming Global ISM PMI index, says Neo Teng Hwee, Chief Investment Officer at UOB private bank. The underlying optimism stems from the upturn of the Global Manufacturing Purchasing Managers Index (PMI) and a foreseeable new wave of manufacturing demand partly driven by the deployment of 5G demand. 

«Today, if you go to Guangzhou, you can see 5G phones. All these will lead to a new wave of industry demand,» said Neo, who was speaking at a media event on Tuesday. In Europe, despite the soft automotive sector this year, hiring in the automotive sector is becoming robust due to the engine electrification process, he added.

Global Weakness Not Broad-Based

Global weakness has been pronounced in global manufacturing sectors this year but this was not the case for services sectors, which was more upbeat. The weakness in the automotive industry contributed greatly to economic weakness in Europe, Neo explains. «Automotive demand from China has been exceptionally weak, versus the huge appetite seen previously.»

However, the automotive sector's shift from the internal combustion engines to electric engines may reverse the subdued investment appetite seen this year. «If we are right about the manufacturing recovery, non-U.S. markets will do better,» he added.

Where To Invest?

The team's balanced portfolio advocates a «neutral» stance on equities and bonds but will look to upgrade equities when there is a correction in prices.  The team believes that returns from global equities are going to be moderate, providing single-digit percentage returns.

«We are going to see earnings growth of 6 to 10 percent. We're not going to get multiple expansion which we saw this year - was huge,» said Neo.

Fixed Income Space

For high-grade bonds, UOB's private bank team foresees limited room for spread compression, and hence, little returns. However, corporate credits, especially those from China, still offer generous spread versus risk-free rates. Of course, investors need to be careful of «land mines» as default rates play up. 

«The net issuances (in Asia) is not very high. So far, they have been well absorbed...Asia has sufficient liquidity,» added Neo.