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Economic growth in Asia and Europe to hold up in 2007, according to UBS Wealth Management
Economic growth in Asia and Europe will continue in 2007 notwithstanding the prospect of tightening fiscal policy in Europe. Against this backdrop, central banks can be expected to continue to raise interest rates, albeit cautiously, notes Dr Klaus WELLERSHOFF, Chief Economist and Head of Wealth Management Research for UBS Wealth Management & Business Banking.
"The housing market-driven slowdown of the US economy, that we outlined more than a year ago, has materialized. Despite the recent positive data, we think there is more weakness to come and continue to see the Fed cutting rates this year both to support the housing market and to prevent weakness from spilling over to other sectors of the economy," noted Dr Wellershoff.
Wellershoff does not expect a recession in the US or a marked contraction in corporate earnings but forecasts earnings to ease from double-digit to single-digit growth. As a result, he remains cautiously optimistic towards global equities, which are expected to continue to outperform government bonds over the next 12 months.
Wellershoff expects "Low-yielding currencies, including the Yen and the Swiss franc are likely to be depressed by carry trades in the short-term but have the potential to appreciate significantly in the medium to long-term," he added.
Yonghao PU, Head of Asia Regional Research, UBS Wealth Management, regards the slowdown in the US as a challenge for Asia and sees weakening US demand combined with strong Asian currencies as threatening the sustainability of export growth in the region.
Asia continues to have difficulty de-coupling fully from the US and Pu advises investors to remain cautious of a number of factors including: rising geopolitical risks in Iran and North Korea; shrinking liquidity; avian flu; global protectionism; and moderating earnings growth and overcapacity. Nonetheless, he believes that structural improvements and the robustness of the Chinese economy mean that the region is better positioned to weather a slowdown in the US than previously.
"China faces the challenge of a rising trade surplus and speculative inflows. As a result, it will need to sterilize inflows and encourage outflow while sustaining the domestic demand. Infrastructure spending will support investment momentum but to prevent overheating and credit expansion, some tightening measures, which have proved effective previously, will stay and become implemented systematically."
Pu sees a revaluation of the Renminbi and rising consumption as key investment themes for the next 12 to 18 months but over the medium term, financial reform, environmental protection and energy conservation will, increasingly, come into play.
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