CFA Society Singapore
SINGAPORE (Dec 5): UBS is forecasting global economic growth to continue its positive momentum over the past year through to 2018, with little evidence of an impending slowdown.
In UBS House View Year Ahead 2018, UBS' Global Chief Investment Office Wealth Management unit looks back on “particularly impressive” expansion in 2017 as demonstrated in the US, Eurozone, China, Japan, Russia and Brazil, which have pushed worldwide GDP up to 3.8% from 3.1% in 2016 based on its estimates.
Overall, UBS expects growth of 3.8% in 2018 as the current rate of expansion continues, with Brent crude projected to trade sideways, reaching just US$57/bbl in 12 months’ time.
With Organisation for Economic Co-operation and Development (OECD) inventories at about 10% above historical norms, this provides a cushion even if oil supplies fall next year, says the firm.
Meanwhile, UBS anticipates stable inflation as central banks keep core measures below targets. It sees just two interest rate hikes in the US and Canada; one in Switzerland, Australia and New Zealand; and for Eurozone, UK and Japan to see their rates on hold for the year ahead – with quantitative easing to continue in Japan and withdrawn only gradually in the US and Eurozone.
As such, UBS remains positive on global equities at a P/E ratio of 18 times, which is in line with their long-term average multiple of 18.3 times, and sees robust earnings growth to push stock markets higher.
“Prices are not yet at levels that have historically presaged weak performance, though investors should not expect a repeat of the double-digit annualised returns seen in recent years. Historically, global equity valuations between 18 and 23 times have been consistent with 6% subsequent 6-month performance,” adds UBS, while also cautioning against taking profits too soon so as to avoid lowering long-term annualised price returns.
Despite its positive view on markets, UBS urges investors to take note of the changing investment context for the year ahead, with the possibility of current “abnormally low” levels of volatility ending due to monetary tightening, political flux, technological disruption and sustainability challenges.
Hence, the investment bank sees opportunities in the financial sector and alternatives, especially for investors looking to reduce portfolio volatility, as it believes investors will need to prepare for high volatility and potentially higher correlations and stock dispersion.
With regards to the political calendar for 2018, it warns of heightened volatility in Brazil, Mexico, South Africa, Spain, and the UK – with China’s One Belt One Road initiative and the US tax reform providing investors with potential politically-driven investment opportunities as well.
UBS also recommends for investors with high weightings to individual industries to prepare for disruption with the onset of new technologies. Opportunities, however, lie in companies with the ability to enable and adopt big data technology, automation and robotics solutions, as well as those in the electric cars and autonomous driving businesses.
Lastly, UBS foresees markets facing continued challenges on a global scale – from climate change to resource overuse, to economic inequality. Hence, it recommends the sustainable industry as a long-term investment opportunity that allows investors to “play an important role in the long-term solution” without sacrificing risk-adjusted returns.
“Looking forward, I expect that if the global growth in total factor productivity – a weighted average of labor productivity and capital productivity – is not significantly increased within the next four or five years, investment will return to the weak level relative to GDP that we have seen over the past decades,” comments Edmund S. Phelps, Nobel Laureate in Economic Sciences 2006, in an excerpt featured from UBS’ Nobel Perspectives microsite.
“It seems to me that investors are already well-prepared for such a period of lower long-term returns,” he adds.