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January 24, 2018

Slow but steady economic growth for 2018

By Dean Turner

UBS Wealth Management’s UK economist Dean Turner, says although there has been a slowdown in UK economic growth last year amid Brexit uncertainty, the UK economy has not been completely thrown off course. UBS Wealth Management predicts slowing but steady growth in the year ahead.

Our sense of cautious optimism is reflected in our 2018 forecasts; we recently upgraded expectations for growth from 0.7% to 1.1%. And we expect the UK economy to maintain this pace going into 2019.

Against this backdrop, we anticipate four key themes to define the year ahead for investors.

First, with higher GDP growth boosting confidence, we expect 2018 will see the end of a decade of quantitative easing.

Central banks are likely to continue stimulus in the coming months, so much so that by the end of this year banks will be net suppliers rather than net demanders of financial assets for the first time since the financial crisis.

Though a change from the status quo, this is not instinctively a cause for alarm. The pace of withdrawal should be gradual and the scale of tightening limited. However, this change may lead to higher volatility in traditional investments like bonds and equities. Investors should look to shelter from this by holding a diversified portfolio.

 

Pictured above: Dean Turner, UK economist at UBS Wealth Management

 

 

Political chatter

Second, political chatter will continue to dominate media debate this year. However, a key takeaway from the last couple of years is that rising political concerns rarely have a noticeable impact on the economy and markets.

The only exception has been the UK, where uncertainty around Brexit remains front of mind.

Yet increased odds of seeing a transition deal have lessened uncertainty surrounding the negotiations. Fundamentally, UK domestic politics should not significantly impact the global economic picture in 2018.

Third, technological advancement continues to create new investment opportunities. In an age of rapid technological change, scientists are setting out alluring visions for the future, which could have a revolutionising effect on industries worldwide.

Technological development in 2018 will both disrupt and delight, but investors looking to ride tech trends in the year ahead should concentrate on substance over style. In our view, the most compelling long-term opportunities will be in digital data, automation and robotics, and smart mobility.

Technology change

Alongside investment opportunities in tech-related businesses, technological change will impact investments in broader sectors.

Technological disruption is likely to cause transformational change across industries such as finance, manufacturing, and automotive to name a few. The best way for investors to shelter from the threat of disruption, and crucially reap the rewards of change, is by avoiding single-stock and sector concentration.

Finally, this year we’ve reached an inflexion point for sustainable investing. Investors are increasingly warming to the idea of making investment decisions in accordance with environmental, social and governance (ESG) factors.

At the same time, new investment strategies are continually being developed to enable investors to achieve their sustainable investing goals without necessarily sacrificing financial returns.

Investors now have the opportunity to make a meaningful mark on the world’s most pressing challenges by constructing a fully diversified portfolio of sustainable investments.

While the global economy stands on solid footing, these trends present investment opportunities.

Risks

Yet investors should remain mindful of the risks with potential to skew the global picture. 2018 puts inflation, geopolitics and China on the map as risks to watch.

Whilst our base case is that inflation will remain muted, an unexpected surge in inflation cannot be ruled out. If we see a tipping point for rising wages and prices in the U.S., inflation concerns will become very real.

A sudden rise could force central banks to tighten policy more than we currently anticipate, raising the risk of an economic slowdown.

Geopolitics also presents high-level risk for investors. While the global economic impact of domestic politics has been limited, factors such as the existent threat of North Korea’s nuclear weapons testing and political instability in the Middle East, bear monitoring. Seeking regional diversification can mitigate this type of risk.

Lastly, investors should not be complacent about Chinese growth. Our base case for the Chinese economy is for its expansion to continue at a robust pace. But debt is on the rise. If China mismanages its growing debt, this would lead to a greater-than-expected economic slowdown with the potential to boost volatility in global financial markets.

Slow and steady growth in the UK and a supportive global economic backdrop should provide reassurance for investors going into this year. Staying diversified and investing for the long-term will enable investors to navigate these emerging trends.

 

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