UBS: ASEAN offers more than an AI-ex-Asia diversification hedge, with select rerating opportunities still available

Overview

This is a UBS ASEAN equity strategy report centered on whether ASEAN markets can attract capital beyond the AI theme. The report notes that ASEAN has underperformed Asia ex Japan and emerging markets over the past three years, mainly because it has few large AI beneficiaries, faced macro headwinds and policy uncertainty, and had weaker earnings expectations. However, as AI-related positioning becomes increasingly concentrated, investors may begin seeking allocations with lower correlation and stronger valuation support, creating conditions for ASEAN to regain attention.

Core views

The report's core view is that AI will continue to dominate regional capital allocation, but ASEAN can benefit through two simultaneous channels: first, as a diversification option outside the relatively crowded AI trade; and second, through selective AI exposure via data centers, power, materials, and parts of the technology supply chain. At the market level, Malaysia benefits from stable macro conditions, MY Value Up, data-center FDI, and the Johor-Singapore Special Economic Zone; Vietnam remains ASEAN's growth story, with potential FTSE and MSCI inclusion catalysts; Singapore retains resilience through reforms and its safe-haven characteristics; Thailand has recovery potential supported by tourism and policy, although macro pressures remain; and Indonesia and the Philippines offer attractive valuations but face higher policy, earnings, and macro risks.

Analysis framework

UBS evaluates ASEAN markets using its EM & APAC equity strategy framework, combining thematic and fundamental factors. Themes include AI revenue exposure, sensitivity to high interest rates and oil prices, changes in macroeconomic growth, UBS analyst-rating bias, and the narrative compass. Fundamentals include 12-month forward PE, PB, ROE, the difference between earnings yield and local bond yields, 24-month forward EPS growth, and a proprietary valuation-perception score.

Methodology notes

• Regional equity strategyEM & APAC Equity strategy framework

  Market-rating framework combining thematic and fundamental factors

  The report uses this framework to compare AI exposure, macro sensitivity, policy reforms, earnings, valuations, and fund flows across ASEAN markets, forming overweight, neutral, or underweight views.

• Valuation and risk premiumEY-BY equity risk premium proxy

  Earnings yield minus local bond yield

  This indicator is used to assess the equity risk compensation relative to local bonds. The report finds Indonesia inexpensive on the screen, the Philippines near expensive levels, Malaysia near its 10-year average, and Thailand already rerated as the political environment improves.

• Policy catalystValue-up programmes

  Market reform programs aimed at improving corporate governance, capital efficiency, and shareholder returns

  Value-up programs introduced by Singapore, Thailand, and Malaysia could improve ROE, ROIC, and investor communication, thereby supporting valuation rerating.

Asset mapping & comparison

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

• Malaysia equities

  Overweight

  Strengths

  Relatively stable macroeconomic and political conditions, with FDI, data centers, JS-SEZ, MY Value Up, and local pension inflows supporting rerating.

  Weaknesses

  Election-cycle risks are approaching, while policy-sensitive sectors such as construction, property, and telecommunications may come under pressure.

  Comparison

  Trading at a discount to ASEAN, but with more stable fundamentals.

  Risks

  GE16-related uncertainty, cost-of-living pressures, subsidy costs, and oil-price risks.

• Vietnam equities

  Overweight

  Strengths

  One of ASEAN's fastest-growing economies, with supply-chain integration, FDI, capital-market reforms, and expected index inclusion providing catalysts.

  Weaknesses

  More sensitive to global growth and trade changes.

  Comparison

  Offers a stronger growth story than most ASEAN markets, but is not the cheapest on valuation and fundamental screens.

  Risks

  High interest rates, tight liquidity, and volatility in external demand.

• Singapore equities

  Neutral

  Strengths

  Capital-market reforms, safe-haven fund flows, and structural demand for banks and technology support resilience.

  Weaknesses

  Global funds are already overweight Singapore, the only ASEAN market with such positioning, so room for further incremental inflows may be limited.

  Comparison

  Stronger defensiveness and reform quality than most ASEAN markets.

  Risks

  Oil-price shocks, interest-rate changes, and index concentration.

• Thailand equities

  Neutral

  Strengths

  Tourism recovery, domestic policy support, and a stabilizing political environment offer recovery potential, alongside some AI-related exposure.

  Weaknesses

  The combination of economic growth and inflation remains unfavorable.

  Comparison

  Scores well thematically, but macro constraints keep the rating at neutral.

  Risks

  Food and energy inflation, El Niño, oil prices, and earnings volatility.

• Indonesia equities

  Underweight

  Strengths

  Inexpensive on valuation and ERP screens, with scope for recovery if policy execution improves.

  Weaknesses

  Policy uncertainty, weak investor sentiment, and high sensitivity to local interest rates.

  Comparison

  Among the most attractive on valuation, but lacking a sufficiently strong catalyst.

  Risks

  Fiscal slippage, policy reversals, rising Indonesian local bond yields, and commodity volatility.

• Philippines equities

  Underweight

  Strengths

  Some valuation support and room for countercyclical fiscal policy.

  Weaknesses

  Below-trend growth, high inflation, and political uncertainty weigh on the market.

  Comparison

  Macro risks are more prominent than valuation support.

  Risks

  Food and energy inflation, sensitivity to US interest rates, the flood-control investigation, the vice-presidential impeachment trial, and policy-execution risks.

Key data

• MSCI ASEAN technology weighting4%Technology has a limited weight in MSCI ASEAN but contributed 25% of the index's year-to-date return.
• Direct AI exposureASEAN 8%, EM/APAC 31%ASEAN has fewer large AI beneficiaries, but still offers some supply-chain and infrastructure opportunities.
• Share of constituents valued below historical averages55%Valuations across the broader market remain attractive, while overall index valuations are lifted by a handful of heavyweight stocks.
• Financials weighting50%MSCI ASEAN is dominated by traditional domestic-demand sectors such as financials, industrials, and consumer.
• ASEAN relative performanceASEAN has outperformed broader EM and Asia by 16% since the KOSPI peaked on 2026-06-22The report views this as an early signal that a diversification trade may be starting.
• Historical impact of Super El NiñoASEAN underperformed by an average of 7%Thailand and Indonesia lagged the most during the two Super El Niño episodes in 2014-16 and 2023-24.
• Singapore EQDP sizeS$6.5bnThe program aims to improve market liquidity, broaden the investor base, and support quality listings through asset managers.
• MY Value Up coverage88 large listed companies, representing approximately 80% of Bursa Malaysia's market capitalizationThe goal is to improve long-term strategic communication, disclosure, and shareholder engagement.

Impact & implications

For asset allocation, the report suggests that ASEAN is not a wholesale substitute for the AI trade, but rather a regional diversification and selective thematic complement outside the crowded AI trade. Malaysia and Vietnam are better suited as active allocation destinations; Singapore and Thailand are appropriate for neutral positions while monitoring reform, safe-haven, and recovery themes; and Indonesia and the Philippines warrant higher weights only after policy stability, earnings improvement, or easing macro pressures.

Risks

• AI remains the core driver of dominant returns; if capital continues to concentrate in North Asian AI leaders, the ASEAN diversification trade may struggle to persist.
• Rising oil prices and food inflation would weigh on growth, earnings, and margins, with the Philippines, Thailand, and Indonesia more vulnerable.
• El Niño could weigh on the economy and consumer-related sectors; historically, ASEAN markets underperformed on average during related cycles.
• Higher interest rates for longer would pressure valuations and fund flows. The Philippines is most sensitive to US rates, while Indonesia is most sensitive to local rates.
• Policy and political uncertainty remain high in Indonesia and the Philippines, while Malaysia's election-related risks are rising.
• If Value-up reforms are not implemented sufficiently, they may fail to deliver the expected improvements in ROE and ROIC or support valuation rerating.

What to watch

• Whether AI-related positioning remains crowded and whether funds begin rotating from North Asian AI leaders toward ASEAN diversification.
• Implementation progress for Malaysia's MY Value Up, GLIC fund direction, data-center FDI, and the JS-SEZ.
• The implementation of Vietnam's FTSE secondary emerging-market inclusion beginning in September 2026, as well as the pathway toward MSCI EM inclusion.
• The impact of oil prices, food prices, and El Niño intensity on the Philippines, Thailand, Indonesia, and Vietnam.
• Whether expectations for the Federal Reserve to remain on hold through June 2027 change, and the rate-hike paths of ASEAN central banks.
• Indonesia's policy execution, political events in the Philippines, Malaysia's election cycle, and Thailand's policy continuity.