2018: Experts say investors in emerging market risk higher volatility

Finance experts at UBS Wealth Management’s Chief Investment Office (CIO) have said investors in emerging market should be prepared for higher volatility, and higher dispersion of returns from individual stocks in 2018.

They noted that Central banks in emerging markets might tighten monetary policy and in some cases raise interest rates in 2018, stating that certain areas, especially financial services, will bring opportunities, except in the unlikely event of significant hikes.

Specifically, the Central Bank of Nigeria (CBN) has come under heavy pressure to reduces its rates, in a move to drive productivity and boost economy growth at large.

According to UBS forecast, “2018 will be positive on global equities relative to high-grade and developed world government bonds. Global economic growth should continue at the high 3.8per cent rate witnessed in 2017”.

They added that the outlook is cautiously optimistic next year.

The report by UBS also expected 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.

The Global Chief Investment Officer at UBS Wealth Management, Mark Haefele said, “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”, he said.

Head of Wealth Management Central and Eastern Europe, Middle East and Africa, France and Benelux International at UBS Wealth Management, Ali Janoudi, said, “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.”

Outside Africa, the report by UBS explained that, “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 310per cent 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 per cent growth versus 6.8per cent 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.”