UBS House View 2016 & Beyond: A world in transition (SWISS VERSION)
Next year investors face a world in transition. Global growth is likely to accelerate moderately despite China continuing to slow; US markets should escape the drag of the strong dollar and low energy prices.
UBS Wealth Management’s Chief Investment Office (CIO) enters 2016 positive on equities and credit, with a bullish stance on the Eurozone in particular.
Long-term themes for 2016 and beyond include demographics, aging and investment in select areas of healthcare, including cancer treatment.
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Zurich, 1 December 2015 – UBS Wealth Management's Chief Investment Office predicts a world in transition in 2016. Global GDP growth is likely to rise to 3.4% from 3.1% this year as emerging markets stabilize and consumer spending in developed economies increases modestly.
Mark Haefele, Global Chief Investment Officer at UBS Wealth Management and UBS Wealth Management Americas, says: "This world in transition will continue to challenge portfolio performance. Our experience shows that a well-defined investment strategy, regular portfolio reviews, and rigorous discipline in execution can help keep performance on track. We enter the year with the view that a modest acceleration in global growth will happen in 2016 and investors should be overweight equities."
Modest improvement in global GDP growth
The US economy should expand by 2.8% next year compared with 2.5% this year. The country must transition away from an era of zero interest rates, and from Barack Obama's presidency to that of his successor. Despite these uncertainties, the drag on US corporate earnings from a strong dollar and low energy prices should abate. Consumer spending should remain robust.
The Eurozone economy is likely to grow 1.8% next year compared to the current 1.5%. Growth in the UK should remain strong, repeating its 2.4% performance. Beset by a migration crisis, Europe faces questions about monetary stability, and the future of the likes of the UK in its political union. Nevertheless, improving growth and ultra-loose monetary policy should support profits in the Eurozone, where we remain overweight equities.
Switzerland's booming domestic economy is acting as a buffer, absorbing the blows from the export sector caused by the strong Swiss franc. Annual immigration of roughly 1% of the population, together with the Swiss National Bank’s ultra-loose monetary policy, continues to support domestic consumption and construction spending. Net exports and investment spending may, however, put a brake on real GDP growth, which we expect to come in at 1.4% next year. The Swiss National Bank is likely to keep its policy rates at their record low negative levels for the foreseeable future as the European Central Bank is forecast to extend its bond-buying program rather than reign in its monetary policy. Despite its excellent competitive position, the Swiss economy will face major challenges from the effects that negative interest rates and aging exert on the Swiss pension system, as well as from the political uncertainties arising from its relations with the EU and access to European markets. In this ultra-low interest environment we continue to favor stocks with high-quality dividends and midcaps with solid growth prospects.
Asian economies are expected to expand more slowly for the third consecutive year, mainly due to China's GDP growth dropping to 6.2%. This is also the single biggest drag on global growth compared to this year. China is shifting from a manufacturing-led to a consumer-led economy, and from a state-directed to a free market. Both transitions will create some uncertainty over its growth path and the outlook for capital flows.
Growth in emerging markets will remain subdued, but should improve to 4.3% compared with 4.1% this year. Emerging markets need to transition their growth drivers with a greater focus on structural and political reform and less dependence on investment, commodities, and cheap capital. They will be under pressure at a time of US interest rate hikes.
Stocks and high yield bonds should deliver positive total returns. Government bond prices are likely to fall while inflation, the oil price and US interest rates will all probably rise. Hedge funds are expected to deliver more favorable risk-adjusted returns in 2016 than in 2015, and for the asset class as a whole returns of 4-6% are expected in 2016.
Long-term investment themes – for growing and protecting wealth
Beyond 2016, long-term themes will continue to shape the investment landscape. A key example is worsening demographics in the US, Japan, Europe and China, which may constrain the outlook for financial assets in coming years and decades. Savings rates are likely to decline as the elderly draw on funds, reducing the glut of money that has buoyed markets. A smaller population of young workers could demand higher wages, igniting inflation and pushing up interest rates.
An aging population will also create opportunities in the healthcare sector. CIO sees earlier-stage cancer research as particularly attractive for long-term investment. Due to cancer's wider social implications, research in this area is particularly suited to impact investment, which aims to produce a defined social benefit as well as a financial return.
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UBS House View: Year Ahead 2016 and Years Ahead – comprehensive digital offering: http://www.ubs.com/houseview
UBS House View: Year Ahead 2016 and Years Ahead 2016 publications as PDF files: www.ubs.com/cio
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