The investment environment has become more challenging as the global economic cycle has entered the late stage cycle. With economic growth, global politics, and central bank stimulus all at turning points, markets are beginning to prepare ahead, UBS points out some of the things that investors should look out for in the current macroeconomic backdrop.
Investors’ Takeaways: 5 Things That Will Define 2019 For Investors By UBS
- Slower Growth And Weaker Earnings
After the global economy posted a 3.8 percent growth in 2018, UBS foresees global economic growth to slow down in 2019. UBS’ forecast for 2019’s economic growth is 3.6 percent with the forecast for China and US being cut. According to UBS, US growth will be constrained by ebbing fiscal stimulus and higher interest rates while China’s growth faces pressure from US tariff and economic rebalancing.
As a result of the slower growth, UBS foresees earnings growth to face similar slowdown as well. The US, which was leading the world in earnings growth, will see its earnings growth fall from an 8-year high of 21 percent in 2018 to four percent in 2019. The one-off boost from corporate tax cuts will wane in effect and US tariffs will soon take a toll on global earnings growth.
- Credit Crunch
2019 is the first year since the global financial crisis where central banks are rolling back from the effects of quantitative easing. Central banks like the Federal Reserve and Bank of England have been reducing their balance sheet since 2017. Tighter monetary policy in 2019 will turn market attention on debt serviceability, especially in US, China and Italy.
- Limited Long Term Return Potential
Following a decade where stock market returns have largely outperformed economic growth, UBS foresees a foreseeable future of limited long term return potential. Furthermore, central banks have also been providing unprecedented support for bonds in the past decade. However, they have started to reel back since 2017, through the reduction in their balance sheet.
- Growth Opportunities And Pockets Of Value
While economic and earnings growth are waning in general, UBS thinks that the slowdown will not be felt evenly. Firms exposed to secular trends like population growth, aging and urbanization are still expected see robust growth. As such, UBS believes that there are growth opportunities and pockets of value for investors to capitalise on.
- Sustainability Plays
The world is entering into a phase of environmental credit crunch. Following decades use of resources in an unsustainable manner, it is starting to take its toll on the financial markets. Corporate behaviour is under greater scrutiny than ever as consumers are starting to shy away from companies that are damaging the environment.
UBS notes that corporate valuations are now increasingly tied to intangible assets like brand reputation, environmental and social corporate responsibility. But this also highlights an opportunity for investors to invest in sustainability plays that can outperform traditional investments.