Amid market volatility and oil shocks, Asia ex-Japan low-risk style rebounded sharply

Overview

This report is UBS's Asia Style Guide, focusing on factor performance, macro drivers, market correlation, cross-sectional dispersion, and valuation changes in Asia ex-Japan equities amid the March market selloff, geopolitical tensions, and oil price impacts. The report shows that declining risk appetite pushed low-risk styles to rebound, while momentum and growth styles lagged, and valuations across regions and sectors broadly compressed.

Core views

The core view is that the March market decline reversed the prior factor trend, with defensive low-risk factors such as low volatility and low price beta outperforming; dividend yield was relatively strong within value, but the broader value style fell; and price momentum and growth-related factors came under pressure. At the same time, oil prices became a much more important driver of market returns, while the influence of the U.S. 2-year yield continued to decline, indicating a shift in the investment environment from rate-driven to one more influenced by energy prices and macro shocks.

Analysis framework

The report uses a quantitative style analysis framework to compare long-short factor performance, forward P/E distributions, macro factor explanatory power, stock-to-stock correlations, and cross-sectional dispersion across Asia ex-Japan, major regions, sectors, and styles. The macro section uses rolling 52-week weekly regressions to assess the contribution of the U.S. dollar index, the U.S. 2-year yield, the U.S. AAA spread, the U.S. 10-year minus 2-year spread, gold, and crude oil to local market returns.

Methodology notes

• Quantitative factorsLong-short factor performance

  Long-short factor performance

  Construct long-short portfolios of style factors to measure the relative performance of growth, momentum, quality, low risk, size, and value styles in the market.

• Macro regressionAdjusted R-squared contribution

  Macro factor return explanatory power

  Use rolling 52-week weekly regressions to calculate each macro signal's contribution to adjusted R-squared and identify the most important current market drivers.

• Market structurePairwise correlation

  Stock pairwise correlation

  Compute average stock correlations using rolling 12-month weekly returns; higher correlation usually means macro factors have a stronger impact on individual stock returns.

• Market structureCross-sectional dispersion

  Cross-sectional dispersion

  Measure stock return dispersion using daily returns; higher dispersion means a greater return spread is available from stock selection.

• Valuation methodsForward PE distribution

  Forward P/E distribution

  Compare current valuations with historical distribution positions through box plots of forward P/E across regions, sectors, and styles.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Asia ex Japan equities

  primary research object

  Strengths

  After the forward P/E fell from 13.5x to 11.8x, valuations are lower than before, and higher cross-sectional dispersion may improve stock-picking opportunities.

  Weaknesses

  MSCI Asia ex Japan fell 13.9% in March, indicating clear market pressure.

  Comparison

  India, Taiwan, and Korea saw the largest valuation compression; mainland China and Hong Kong, ASEAN, Taiwan, India, and Korea differ in correlation and dispersion.

  Risks

  Macro shocks, oil-price volatility, rising correlation, and further regional market declines.

• Low Risk factors

  leading style in the month

  Strengths

  Low volatility rose 10.5% and low price beta rose 8.1%, showing defensive characteristics during the market decline.

  Weaknesses

  If market risk appetite recovers quickly, low-risk styles may lag relatively.

  Comparison

  Compared with growth and momentum styles, low-risk styles outperformed significantly in March.

  Risks

  Factor rotation, crowded trades, and reversals in risk appetite.

• Momentum and Growth factors

  lagging styles in the month

  Strengths

  They can usually capture strong assets in trend-following environments, but evidence is limited this period.

  Weaknesses

  Price momentum fell 7.2%, and growth-related factor valuations declined sharply.

  Comparison

  They were clearly weaker than low-risk and dividend-yield factors.

  Risks

  Trend reversals, valuation compression, and amplified market volatility.

• Crude oil

  key macro driver

  Strengths

  Its importance for energy-related returns and macro explanatory power has increased.

  Weaknesses

  Oil shocks may intensify market volatility and regional pullbacks.

  Comparison

  Crude oil's impact rose from near zero to about 13%, while the U.S. 2-year yield impact fell from 7% to 1%.

  Risks

  Middle East conflicts, supply disruptions, changing inflation expectations, and repricing of risk assets.

Key data

• MSCI Asia ex Japan monthly performance-13.9%The market broadly declined in March.
• Low volatility factor performance+10.5%Low-risk styles led during the month.
• Low price beta factor performance+8.1%Low-risk styles benefited from rising market volatility.
• Dividend yield factor performance+9.4%Performance diverged within value, with dividend yield relatively strong.
• Broad value factor performance-3.9%The value style did not benefit across the board.
• Price momentum factor performance-7.2%Momentum factor pulled back sharply in March.
• Macro factors' contribution to return variance23%Up by about 8 percentage points from the prior period.
• Crude oil impactabout 13%Rising rapidly from near zero to become an important macro driver.
• U.S. 2-year yield impactfrom 7% to 1%Declined for the second consecutive month.
• Asia ex Japan 12-month forward P/Efrom 13.5x to 11.8xThe market decline led to an overall valuation compression.
• Regional cross-sectional dispersionrose to 38%Increased by about 6 percentage points at the regional level.

Impact & implications

For investors, the report suggests that in periods of market pullback, oil shocks, and rising macro uncertainty, defensive styles such as low risk and dividend yield have greater relative resilience; by contrast, momentum and growth styles are more likely to be squeezed during trend reversals. Broad valuation declines may improve the medium-term attractiveness of some markets, but in the short term investors still need to monitor oil prices, macro correlations, and changes in regional dispersion.

Risks

• Quantitative models rely on financial statements, earnings forecasts, and price data; input errors can affect results.
• The model estimates strategy effectiveness and relationships using historical data, and those relationships may change in the future.
• Unusual company-specific events may override the impact of systematic factors on stock ranking and scoring.
• Macro variables such as oil prices, exchange rates, interest rates, and credit spreads may change the market driver structure.
• This report is general research communication and does not constitute personalized investment advice for any specific investor.

What to watch

• Whether crude oil's explanatory power for Asia ex-Japan market returns continues to rise.
• Whether the decline in U.S. 2-year yield impact will turn higher again.
• Whether low-risk styles can sustain relative outperformance after the market stabilizes.
• Whether momentum and growth styles recover or continue to be dragged down by valuation compression.
• Changes in capital flows and earnings expectations after valuation compression in India, Taiwan, and Korea.
• Whether regional cross-sectional dispersion and stock correlations create a better environment for active stock selection.