In its 2018 investment outlook, UBS Asset Management said it forecasts equities to continue to perform well in the coming year, but doesn’t expect as robust returns as 2017 has produced.
It also said that although the global equity markets have not suffered a major drawdown for an unusually long period, the risk of recession in the US and other developed nations is low, and equities globally remain attractively valued.
“We are in the broadest period of economic growth in a decade,” said Erin Browne, UBS Asset Management’s head of asset allocation, said in a presentation of the report.
The report also said that European Central Bank (ECB) policy, improving consumer and business sentiment, accelerating credit growth, and a healthier banking sector are all contributing to the recovery in Europe. It added that although geopolitical risks in the Eurozone have lessened near-term, they have not entirely disappeared, citing 2018’s elections in Italy as the most obvious potential flash point.
“We view the combination of accelerating global growth and low inflation as supportive to equities in particular,” said UBS Asset Management in its report. “The outlook for global earnings remains constructive, with both the Eurozone and emerging markets at earlier stages of their recovery than the US.”
As for the US economy, “we also believe there is upside to current expectations for US economic growth and corporate profitability from corporate and personal tax reform,” UBS said. “Events in Washington are likely a key focus for investors in the coming months.”
It said the 10-year US Treasury remains low by historical standards, but is attractive relative to most other developed government bond markets. The investment team also said it expects two to three Fed rate hikes in the coming year.
“In the absence of a material pick-up in inflation, US yields are likely to remain range bound,” said UBS. “Our overall assessment is neutral. “
The outlook said that the one area within the credit universe that stands out from a more positive perspective is emerging market debt. The spreads between local currency and US dollar-denominated emerging market debt and US Treasuries also remain low by historical standards, said the report.
According to UBS, China remains both a risk and an opportunity. “China and Asia are at the forefront of everything,” said Suni Harford, head of investments for UBS Asset Management, at the presentation.
Too much stimulus, said UBS, and the imbalances in the economy, including high debt levels, are further exacerbated. However, too little, and bad debts may rise significantly. “The Chinese authorities face a difficult balancing act in sustaining a smooth demand trajectory as China transitions to a more balanced economy,” said the report.
In general, the Chinese economy has surprised to the upside in 2017, said UBS, which believes continued fiscal support is likely to be key once again in 2018.
“China cannot grow at 10% forever, it’s going to go down,” said Federico Kaune, head of emerging markets fixed-income for UBS, who forecast growth for China at 6.3%. However, he added that it is “our view is that they will be able to manage the transition.”