Investing.com– UBS analysts said they still maintain an overweight position in Chinese stocks despite the recent correction, but they have doubts whether the recent rally in emerging-market stocks can be sustained.

The MSCI EM stock index is up about 7.7% since the start of 2024. However, UBS noted that 78% of that gain came from just five stocks, mostly in the AI/internet sector.

The brokerage said emerging markets are significantly undervalued relative to developed markets and that the sector is likely to see slower earnings in the second half of 2024 due to headwinds from the U.S. election, delayed interest rate cuts by the Federal Reserve and a strengthening dollar.

Still, UBS expects emerging markets to post stronger earnings growth than developed markets over the next two years, with technology stocks in Taiwan and South Korea providing the biggest boost to overall gains.

UBS is overweight in China

The brokerage said it still maintains an overweight position in China, even as the country’s stocks have fallen sharply from their May 2024 highs.

A slowdown in the property sector was a major concern, despite continued support from Beijing. Slower-than-expected growth in domestic consumption was also a concern.

However, UBS said the Chinese market still has the potential to outperform with more government support, with earnings growth now appearing to be stabilising from COVID-era lows.

In July, attention will focus on the Third Plenum of the Chinese Communist Party, a meeting of top Chinese officials where Beijing is likely to unveil proposals for further economic stimulus measures.

UBS upgrades South Africa and Singapore’s ratings

The brokerage said it had raised South Africa’s rating from Neutral to Overweight, citing easing political uncertainty following the formation of the government. UBS also sees the country’s market-friendly policies and said South Africa is “one of the cheapest markets in our universe” after lagging for the past few years.

UBS also raised its rating on Singapore shares to “neutral” from “underweight,” citing less stressed valuations and mighty earnings, especially at the island nation’s largest banks.

The brokerage house was negative about Latin America, lowering its rating for Brazil to Neutral and for Mexico to Underweight.