Global investment environment offers opportunities and risks in 2018

The global investment environment offers growing opportunities and risks in 2018, with Asian equities among the most positive but a Chinese debt crisis is not expected, according to a UBS Wealth Management's Chief Investment Office forecast.

An extreme financial outcome, principally a Chinese debt crisis, is unlikely to materialize in 2018 but still the issue is worth monitoring, UBS said in its latest report. Total bank assets in China are equivalent to 310 percent of the country's gross domestic product — nearly three times higher than the average in emerging markets.

UBS also said that China's high economic growth rate and currently-closed capital account make it less susceptible to a debt crisis. The Swiss bank's baseline forecast for China's economic growth in 2018 is 6.4 percent versus 6.8 percent expansion in 2017.

"Asia’s economic outlook seems positive, and we’re expecting the rise of innovation as the next driving force in the region," said Min Lan Tan, APAC regional head and chief investment officer at UBS Wealth Management. 

As Asian markets are thriving in the current environment, Asia ex-Japan equities should see further upside in the coming year as  corporate earnings and economic activities are expected to be robust, the report said. 

"We see more upside to Asian equities, and are most positive on the equity markets in China, Indonesia, and Thailand", Tan said, adding that Asian markets are likely to see broader investment and credit growth in 2018. 

But he cautioned that "uncertainties about monetary policies and geopolitics stress the need for investors to have a well-diversified strategic asset allocation."

However, increased demand would lift inflation by 0.5 to 1 percent, which, along with US monetary tightening, may prompt Asia-Pacific central banks to hike rates by around 25–50 basis points in the second half of 2018. Although this should cause economic activities to slow a notch, robust corporate and household balance sheets should prevent a more pronounced slowdown.

The global economic growth rate is likely to stabilize at 3.8 percent next year, but investors should be alert to emerging opportunities and risks resulting from monetary tightening, political upheaval, technological disruption, and environmental and social change, UBS said.

The year 2017 has been the strongest for the global economy since 2011, with the growth likely to rise to 3.8 percent from 3.1 percent in 2016, and "there is little evidence today of an impending recession" in 2018, Mark Haefele, global chief investment officer at UBS Wealth Management, said.

Haefele is certain capacity constraints, oil price shocks, excessively tight monetary policy, contractions in government spending, or financial crises will not materialize next year.