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In 2007 the US and European economies will lose steam, while Asia will post solid growth rates
UBS Wealth Management Research Study: "UBS global outlook" 2007
Slower growth in the US is likely to increase risks in financial markets.
Asia: Economic slowdown in 2007 delayed as positive fundamental drivers for Asian markets remain in place.
Eurozone: Strong economic momentum in 2006, but outlook for 2007 is somewhat less favorable.
Swiss economy set for a growth slowdown due to fading export growth and investment spending.
Following a year of attractive returns in most riskier asset classes, investors are advised to remain committed to equities, which still have the potential to outperform global bonds.
The study by UBS Wealth Management Research addresses the global economic prospects for 2007. The slowdown in the US economy will cast its shadow. Other regions of the world also demonstrate lower growth prospects than they did in 2006. The study discusses the possible effects the US slowdown will have on financial markets and points out the opportunities and risks for different asset classes and markets in 2007.
Growth slowdown in the US
UBS analysts have been predicting a US slowdown for over a year, and now this scenario is materializing. Looking into 2007, UBS analysts expect slower US growth than most other economic forecasters. While the world's other major economies will be affected by slower US growth, their own domestic demand should continue to drive global growth. In this challenging economic environment, investors will become more aware of risks; any disappointing economic news, or political events, may lead to temporary market corrections.
Asian economic slowdown delayed
2006 has been another vintage year for Asia. Equity markets are up more than 25% year-to-date, while economic growth will likely surpass last year's level. While UBS analysts expect a slightly rougher environment ahead in 2007, they do not think the current slowdown in the US economy will derail the Asian economic train. China and most other countries will slow down as export growth moderates, but a pick-up in domestic demand will compensate partly. And although UBS analysts are unlikely to see comparable performance numbers in 2007, apart from a US consumer slowdown, positive fundamental drivers for Asian markets remain in place. UBS analysts expect the revaluation of Asian currencies, which started to gain speed in 2006, to continue in 2007.
Eurozone: Outlook less favorable Economic growth accelerated strongly in 20
06, helped above all by a recovery in investment expenditure. Full year 2006 GDP growth is on target to be the strongest in six years. The recovery has broadened in the course of 2006 and the conditions are in place for a continuation of the upswing in 2007. However, the policy-mix is becoming less favorable for continuing growth, owing to higher interest rates and tighter fiscal policy in particular. Combined with the cyclical deceleration in the US, these factors should put a temporary dampener on Eurozone growth in 2007.
Switzerland: Consumption will be the key growth driver in 2007
After an exceptionally good year in 2006, UBS analysts think the Swiss economy is likely to slow to a more moderate pace in 2007, due mainly to the more muted economic outlook in the US and the Eurozone. UBS analysts think that weaker exports and a deceleration in capital spending will probably cause growth to decelerate. In contrast, the environment for consumer spending remains favorable. UBS analysts predict that in 2007 private consumption will help the Swiss economy to maintain a robust level of expansion on the back of positive employment and wage trends.
Global equities can outperform global bonds
In spite of a slower US growth rate, UBS analysts see positive prospects for stocks over the next two to three years. While corporations may find it more difficult to expand their profits, an outright earnings contraction appears unlikely. Moreover, UBS analysts estimate that equity valuations are broadly fair, making equities attractive over the next two to three years. In the view of UBS analysts, the broad equity market should be able to withstand next year's tougher investment environment. Equities have the potential to outperform bonds. Investors are advised to remain committed to equities, in accordance with their long-term portfolio goals.
Slowdown will increase pressure on high yield bonds
UBS analysts expect the unfolding US slowdown to create some headwinds for High Yield and Emerging Market bonds. These segments performed well during the last year, but the environment has changed and further improvements in credit fundamentals are unlikely. These bond segments are now expensive and investors need to understand that exploiting the yield pickup over high-grade bonds will become riskier in 2007. As government bonds are also unlikely to significantly outperform cash, bond investors will have to be more selective in their choices in 2007.
Investment opportunities in a more demanding risk environment
While financial market performance may moderate in 2007 compared to 2006, the coming year also offers attractive opportunities for investors. The still-solid market fundamentals suggest that market corrections should provide interesting opportunities in equity markets. Interestingly, in spite of a slower US growth rate, UBS analysts prefer US and European equities to other stock markets.
Andreas Hoefert, Head Global Economic Research, UBS Wealth Management Research
Brian Rose, Wealth Management Research Asia Pacific, UBS Wealth Management Research
Christian Hefti, Head Wealth Management Research Germany, UBS Wealth Management Research
Angus Pearson, Global Investment Recommendations UK, UBS Wealth Management Research
Stephen Freedman, Head Global Asset Allocation, UBS Wealth Management Research
+41-44-234 48 27
Giorgio Cortiana, Head Corporate Research Europe, UBS Wealth Management Research
+41-44-234 31 25
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