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UBS House View 2018: Changing context
UBS Wealth Management’s Chief Investment Office (CIO) enters 2018 positive on global equities relative to high-grade and developed world government bonds. Global economic growth should continue at the high 3.8% rate witnessed in 2017.
Nevertheless, investors face changing monetary, political, technological, social, and environmental contexts, with three principal risks to the bull market: a significant rise in interest rates; a US-North Korea conflict; and a China debt crisis.
2018's UBS House View Year Ahead contains guest contributions from past Nobel Laureates in Economic Sciences. For full information, visit ubs.com/cio and search for #UBSYA18 on Twitter, Facebook, and LinkedIn.
Zurich, 29 November 2017 – UBS Wealth Management's Chief Investment Office foresees a changing context for portfolios in 2018. The year 2017 has been the strongest for the global economy since 2011, with growth likely rising to 3.8% from 3.1% in 2016. Next year, growth is likely to stabilize at 3.8%, providing a benign backdrop for stocks. However, investors should be alert to emerging opportunities and risks resulting from monetary tightening, heavy political calendars, technological disruption, and environmental and social change.
Mark Haefele, Global Chief Investment Officer at UBS Wealth Management, says: "Periods of high economic growth often sow the seeds of their demise. But there is little evidence today of an impending recession. Historically, recessions have been caused by one or more of: capacity constraints, oil price shocks, excessively tight monetary policy, contractions in government spending, or financial crises. None look likely to materialize in 2018. In this environment, we remain positive on equities relative to high-grade and government bonds."
To read the Year Ahead in full, including comments from past Nobel Laureates in Economic Sciences, visit ubs.com/cio. Follow the conversation on Twitter, Facebook, and LinkedIn via #UBSYA18.
The global context: Key changes, key risks
Central banks will tighten monetary policy and in some cases raise interest rates in 2018. In certain areas, especially financial services, this will bring opportunities, except in the unlikely event of significant hikes. But amid rising rates, investors will also need to prepare for higher volatility, higher dispersion of returns from individual stocks, and in some cases higher correlations between equities and bonds. Conversely, this may benefit alternative and other active asset managers.
Extreme political scenarios, principally a US-North Korea conflict, remain a low-probability risk for markets. However, politics may have a significant local impact. Investors can either hedge this by diversifying their portfolios globally or by treating it as an opportunity, particularly in the case of longer-term trends such as emerging market infrastructure development.
Likewise, extreme financial outcomes, principally a Chinese debt crisis, are unlikely to materialize in 2018 but worth monitoring. Total bank assets in China are 310% of GDP, nearly three times higher than the emerging market average. However, China's high growth rate, powerful state, and closed capital account make it less susceptible to debt crises. Our base case is for 6.4% growth versus 6.8% in 2017.
Finally, social, environmental, and technological change continue to present both opportunities and risks. For the stock market, we see the most important long-term tech themes as digital data, automation and robotics, and smart mobility. Investors can also put capital to work in a variety of social and environmental fields across the growing field of sustainable investing, including multilateral development bank bonds and impact investing as well as listed equities.
Americas & Emerging Markets
The US economy should expand by 2.2% next year, the same rate as in 2017. The country should benefit from strong labor markets and corporate profitability. We expect the Fed and the Bank of Canada to hike rates twice. In Latin America, we see growth increasing from 0.5% to 3.1% in Brazil and from 2% to 2.2% in Mexico. This should help support emerging market debt, which offers average valuations relative to fixed income in other regions.
Europe & Switzerland
In Europe, growth could moderate in 2018, falling from 2.3% in the Eurozone and 2.2% in the EU this year to 1.9% next year. However, we see pockets of acceleration – for instance in Switzerland, where growth should accelerate from 0.8% to 1.8%. We remain positive on Eurozone relative to UK equities. Leading economic indicators are at multi-year highs in the Eurozone, and its companies are highly geared to an improving global economic outlook.
The outlook for the Asia Pacific region remains varied but upbeat in 2018. Japanese growth is likely to remain flat at 1.8%. China will continue to experience a managed slowdown, with property construction slowing in response to falling prices. By contrast, India's growth should overtake China's, rising from 6.6% to 7.4% as economic reforms start to have a positive effect.
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