Zurich, Switzerland. December 14, 2017. UBS Wealth Management’s Chief Investment Office (CIO) forecasts that 2018 will be 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.
For emerging markets, the outlook is cautiously optimistic. However, South Africa’s political risk outweighs the nation’s growth perspectives in fast developing sectors such as technology.
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.”
Overall, UBS expects emerging markets to be well prepared to weather gradual monetary tightening globally. In addition, few other regions are better positioned to benefit from growth in the technology sector.
Within Africa, however, political risks may in some limited cases overshadow investment opportunities. Depending on the outcome of ANC elections later this month, South Africa’s credit rating in particular might deteriorate further after S&P’s downgrade a few days ago, potentially discouraging foreign investment.
Ali Janoudi, Head of Wealth Management Central and Eastern Europe, Middle East and Africa, France and Benelux International at UBS Wealth Management, adds: “Longer term, we continue to see significant potential for African economies, supported by demographic trends, and particularly visible in technological progress. In the case of South Africa, such opportunities seem currently challenged by political risks in the short term.”
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.