Coming in a little late to the game, UBS today released its top 5 themes and 19 trades for 2018. Not surprising from the bank whose base case S&P forecast is 2,900 one year from now (with potential upside to 3,200), and who just told CNBC that “valuations are still somewhat cheap”, the bank is optimistic, if not “rationally euphoric” and writes that it all boils down to one question: will the Kool-Aid party continue, or “will underlying macro shifts reveal fragilities in asset valuations” and more specifically, will the yield curve invert. To wit:
The key macro issue for investors in 2017 was the likelihood of “global reflation” and its form. At the time, we urged investors to invest in growth, but fade expectations of higher inflation. In 2018, the pivotal question is: Is there macro room for markets to grow, or will underlying macro shifts reveal fragilities in asset valuations? And before UBS clients get nervouse by this rhetorical question, the bank adds that it thinks “yes there is room to grow”, and “we remain broadly constructive risk assets.”
Solid growth, relatively low core inflation, and easy financial conditions imply a continuation of the low vol regime that has supported risk assets (Figures 1 & 2). Although many are concerned about the rise in P/Es, we have shown that high P/Es amid lower growth are a rational reflection of the low risk-free rate regime, not a source for concern. Although we remain constructive equities, given some potential slowing in global growth momentum, we see 10% returns as more likely in 2018 than a repeat of 2017’s nearly 20% return.
This post was published at Zero Hedge on Dec 4, 2017.
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