WWRR Vol.2.017

Equities
Oslo, Norway. Ole Jørgen Bakken, Unsplash
Equity investors should brace for
volatility but stay invested. Politics,
monetary policy, and incoming
economic data will all contribute
to higher volatility, but we don’t
expect a recession, see valuations
at a discount to historical averages,
and note returns in the latter
part of the cycle are often good.
Look for value to outperform
growth in the US and emerging
markets, and consider neglected
sectors like US financials and
global energy.
Late-cycle return potential. We do not
expect a recession in 2019 and see global
GDP expanding at 3.6%, with a mid-single
digit rate of earnings growth. US stocks have
returned 12% on average in the year leading
up to the six months before the onset of a
recession, based on data going back to 1945
(see Fig. 1.4), but monetary policy, politics,
and incoming data will all play a role in shaping
the outlook.
Favorable valuations. The 12-month forward
price-to-earnings ratio of around 14x for
global equities represents a 10% discount to
the three-decade average (see Fig. 3.1). The
equity risk premium, which gauges the attractiveness
of stocks versus bonds, is around 6%
versus an average since 1991 of 3.4%.
Fig. 3.1
Valuations are attractive relative to
historical averages
MSCI All Country World Index 12-month forward P/E
and its 30-year average
30x
25x
20x
15x
10x
5x
0x
1988 1993 1998 2003 2008 2013 2018
forward P/E MSCI ACWI
30-year average
Source: Thomson Reuters, UBS, as of 7 November 2018
26 Year Ahead 2019 – UBS House View