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UBS Wealth Management Releases Investment Outlook For 2009

by Phillip Morton, Investors

10 December 2008

In a new report, UBS Wealth Management Research projects a further sharp slowdown in the global economy in 2009, although the bank foresees "pockets of value" for investors in some sectors next year, especially corporate bonds.

Not unexpectedly, the 2009 report, entitled: "Proceed with caution" predicts that most developed countries, including the United States, Europe and Japan, will slip further into recession next year. However, it anticipates a "mild recovery" during the latter half of 2009. Meanwhile, emerging markets will slow considerably, the report forecasts.

The authors conclude that risk in financial markets will remain elevated, especially given the expected decline in corporate earnings during 2009. However, they also identify some opportunities for investors, particularly in corporate bonds, where investors can "selectively rebuild risk positions." The report also forecasts US dollar weakness in 2009 amid a soft US economy and projected large government and foreign trade deficits.

According to the report, the US will experience its worst recession in more than 25 years. Europe is expected to experience more mixed fortunes, with the UK and Spain in the worst shape, and Switzerland and Germany better positioned to weather the downturn.

Although the economic forecast for 2009 is bleak, UBS Wealth Management Research notes that financial markets have also "priced in" a lot of bad news. For 2009, the authors stress the importance of portfolio diversification, a defensive investment stance, and taking "calculated risks" as a means to achieve above-market performance.

UBS expects corporate bonds to deliver some of the strongest returns in financial markets during 2009. Although corporate default rates are likely to increase significantly from their current low levels, the research report concludes that yields for corporate bonds more than compensate for this risk. Consumer-related sectors, such as the US automotive sector, appear most at risk, it argued. Instead, the research team favours bond sectors that are less exposed to the declining discretionary spending of consumers and the overall economic weakness, such as utilities, telecoms, and consumer staples.

The report's outlook for stocks is cautious: while there are "strong valuation signals" in equity markets, especially in Europe, further weakness in equities cannot be ruled out, it warned, as the economic downturn "will inevitably lead to a cyclical contraction in corporate earnings."

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