UBS believes ASEAN can benefit from AI trade diversification, but opportunities should be selected by market

Overview

This is a UBS ASEAN equity strategy report focused on whether ASEAN can attract more capital beyond the AI theme. The report argues that ASEAN has lagged North Asia and other Asian markets over the past three years, mainly due to limited large AI beneficiaries, macro headwinds, policy uncertainty, and weaker earnings expectations. However, as AI-related positioning becomes increasingly concentrated, investors may seek allocations with lower correlation to the U.S. and broader emerging markets, giving ASEAN diversification value. At the same time, capital market reforms and value-up initiatives in Malaysia, Singapore, and Thailand, together with Vietnam's growth and index inclusion expectations, could become catalysts for regional rerating.

Core views

UBS believes AI will remain the dominant theme for capital allocation in 2026, but ASEAN can benefit both from diversification demand outside crowded AI trades and from selective opportunities through AI infrastructure supply chains such as data centers, power, and materials. At the market level, Malaysia is overweighted due to macro stability, MY Value Up, data centers, and FDI related to the Johor-Singapore Special Economic Zone; Vietnam is overweighted due to strong growth, reforms, and expected inclusion in the FTSE Secondary Emerging Markets index; Singapore is neutral, supported by reforms, safe-haven flows, and structural demand for banks and technology; Thailand is neutral, with recovery potential from tourism and policy support but still facing macro pressure; Indonesia is cheap on valuation but lacks sufficient policy execution and catalysts, while the Philippines is underweight due to weaker growth, high inflation, and political uncertainty.

Analysis framework

The report uses a top-down regional equity strategy framework, combining thematic factors, earnings and valuation fundamentals, fund flows, industry structure, macro sensitivity, and policy reforms to assess ASEAN markets. Thematic dimensions include AI revenue exposure, benefit from higher interest rates and oil prices, changes in macro growth, UBS analyst rating bias, and a narrative compass capturing market-specific factors; fundamental dimensions include 12-month forward PE, PB, ROE, the spread between earnings yield and local bond yield, 24-month forward EPS growth, and UBS's proprietary valuation perception score.

Methodology notes

• Equity strategyEM & APAC Equity strategy framework

  Emerging Markets and APAC market scoring framework

  Used to compare markets across the broader emerging markets and Asia-Pacific equity universe, combining dynamic thematic factors and stock fundamental factors to form market ratings.

• Thematic analysisAI revenue exposure

  AI revenue exposure

  Measures the linkage of a market or company to the AI investment cycle and related infrastructure supply chain; the report notes ASEAN's direct AI exposure is only 8%, below EM/APAC's 31%.

• Valuation analysisEY-BY spread equity risk premium proxy

  Equity risk premium proxy based on earnings yield minus local bond yield

  Used to observe risk compensation for equities relative to local bonds; based on this, the report views Indonesia as cheap, the Philippines as near the expensive range, Malaysia as near its 10-year average, and Thailand as already rerated.

• Reform catalystValue-up programme comparison

  Value-up program comparison

  Compares Singapore's EQDP and Value Unlock, Thailand's Corporate Value Up and Jump+, and Malaysia's MY Value Up to assess their impact on corporate governance, capital allocation, ROE/ROIC, and valuation rerating.

Asset mapping & comparison

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

• Malaysian equities

  Overweight

  Strengths

  Relatively stable macro and political backdrop, with MY Value Up, data center FDI, the Johor-Singapore Special Economic Zone, domestic pension inflows, and tech-related opportunities supporting rerating.

  Weaknesses

  Entering the election cycle, and policy-sensitive sectors such as construction, property, and telecom may come under pressure.

  Comparison

  Trades at a valuation discount relative to ASEAN, but fundamentals are more stable and the risk premium is near the 10-year average.

  Risks

  Election uncertainty, cost-of-living pressure, subsidy costs, and oil price risk.

• Vietnamese equities

  Overweight

  Strengths

  Still ASEAN's leading growth market, with global supply chain integration and FDI inflows supporting structural growth; FTSE Secondary Emerging Markets inclusion and the 2030 MSCI EM target provide potential fund flow catalysts.

  Weaknesses

  More sensitive to global growth and trade changes, and not the cheapest on valuation and fundamental scores.

  Comparison

  Still trades at a discount relative to other ASEAN markets, but the discount may narrow as emerging market inclusion momentum strengthens.

  Risks

  Higher interest rates, tighter liquidity, and external trade volatility.

• Singapore equities

  Neutral

  Strengths

  Capital market reforms, safe-haven characteristics, and structural demand for banks and technology support resilience, while EQDP and Value Unlock may improve liquidity and valuations.

  Weaknesses

  It is already the only overweight ASEAN market among global investors, so room for further incremental inflows is relatively limited.

  Comparison

  More defensive than other ASEAN markets and has already rerated alongside ROE improvement.

  Risks

  Interest rates, global risk appetite, and earnings volatility related to internet and technology.

• Thai equities

  Neutral

  Strengths

  Tourism recovery, domestic policy support, and improved political stability provide recovery potential, while Delta Thailand offers relatively prominent AI-related exposure.

  Weaknesses

  The growth and inflation mix remains under pressure, and valuations have already reflected improvement expectations to a large extent.

  Comparison

  Recent rerating reflects a more stable political environment, but macro challenges limit upside.

  Risks

  Food and energy inflation, El Niño, oil prices, and weak macro growth.

• Indonesian equities

  Underweight

  Strengths

  Valuation and equity risk premium indicators suggest the market is relatively cheap, and some policy rollbacks may improve the investment environment.

  Weaknesses

  Policy execution, fiscal slippage, and weak investor confidence remain major drags, with a lack of stronger catalysts.

  Comparison

  Ranks attractively in the valuation and fundamentals mix, but thematic and policy risks offset the valuation advantage.

  Risks

  Policy uncertainty, sensitivity to local interest rates, oil prices and inflation, and fiscal discipline risk.

• Philippine equities

  Underweight

  Strengths

  Valuations have rebounded from low levels, and improved political stability could support durable governance and reform.

  Weaknesses

  Below-trend growth, elevated inflation, sensitivity to external financing, and political uncertainty make macro risks greater than valuation support.

  Comparison

  Within UBS's framework, thematic scores are weak, and the equity risk premium is near the expensive range.

  Risks

  Food and energy inflation, U.S. yields, the flood control investigation, the vice president's impeachment trial, and policy execution uncertainty.

Key data

• MSCI ASEAN technology weighting4%Technology accounts for 48% in MSCI Asia ex Japan, showing ASEAN's direct AI exposure is significantly lower.
• Technology contribution to MSCI ASEAN year-to-date returns25%Despite its low weight, technology still significantly boosted index returns.
• Proportion of MSCI ASEAN stocks trading below historical average valuation55%Shows that the broad market still has valuation support, though the index level is lifted by a few heavyweight names.
• ASEAN direct AI exposure8%Below EM/APAC's 31%, but selective supply chain opportunities still exist.
• MSCI ASEAN financials weighting50%The ASEAN index remains dominated by domestic and traditional sectors, with financials as the largest sector.
• ASEAN relative performance during El Niño periodsaverage underperformance of 7%Based on the 2014-16 and 2023-24 super El Niño cycles, with Thailand and Indonesia lagging more.
• Singapore EQDP sizeS$6.5bnAims to improve liquidity, broaden the investor base, and support quality listings through asset managers.
• MY Value Up coverage88 large listed companies, accounting for about 80% of Bursa Malaysia market capAims to improve long-term strategic communication, disclosure, and shareholder engagement.
• Bank Indonesia rate hikes year-to-date100bpThe report expects another rate hike in August.
• Bangko Sentral ng Pilipinas rate hikes year-to-date50bpThe report expects further rate hikes in the third quarter.

Impact & implications

For investors, ASEAN is not simply an AI substitute, but a combination of diversification allocation after highly concentrated AI trades and exposure to parts of the AI infrastructure supply chain. The strategic implication is to avoid buying the region as a whole, and instead allocate by country around market reforms, earnings visibility, valuation support, macro resilience, and changes in fund flows. Malaysia and Vietnam have clearer structural and policy catalysts, Singapore has defensive and reform attributes, and Thailand is more of a recovery trade; although Indonesia and the Philippines offer valuation or stock-specific opportunities, macro, policy, and political risks still weigh on overall allocation.

Risks

• AI remains the dominant force in global capital allocation; if AI trades continue to concentrate in North Asia and the U.S., diversification inflows into ASEAN may be limited.
• Rising oil and food prices would pressure growth, earnings, and margins, with the Philippines, Thailand, and Indonesia more vulnerable.
• El Niño may bring pressure on agriculture, consumption, and margins; historically ASEAN markets underperformed by an average of 7% during such cycles.
• Higher-for-longer U.S. rates and local rate hikes would pressure valuations; the Philippines is more sensitive to U.S. yields, while Indonesia is more sensitive to local bond yields.
• Policy and political uncertainty in Indonesia and the Philippines may continue to weigh on investor sentiment.
• As Malaysia enters the pre-election cycle, foreign flows and policy-sensitive sectors may become more volatile.
• If value-up reforms are insufficiently executed, they may fail to deliver sustained ROE/ROIC improvement and valuation rerating.

What to watch

• Whether concentration in AI-related positioning continues to rise, and whether capital spreads from North Asia AI winners into ASEAN.
• Net foreign buying or selling trends in Thailand, Malaysia, Indonesia, and the Philippines.
• Implementation progress of MY Value Up, Singapore's EQDP/Value Unlock, and Thailand's Corporate Value Up and Jump+.
• Progress on Vietnam's inclusion in the FTSE Secondary Emerging Markets index, and its path toward MSCI EM inclusion.
• Changes in oil prices, food prices, Middle East risks, and El Niño intensity.
• Policy rate paths of the FOMC, Bank Indonesia, BSP, BoT, and BNM.
• Political events in the Philippines, including the flood control investigation and the outcome of the vice president's impeachment trial.
• The timing of Malaysia's GE16, policy signals, and foreign fund flows ahead of the election.