Towards the end of last year, Swiss bank UBS’s economists issued an annual summary, with forecasts for 2017. Back then, UBS had estimated that the euro would gain significant strength against the dollar, and was right on. “Contrary to most of the prominent economists in the world, we predicted at the end of 2016 that the euro would strengthen against the dollar during 2017. Now, of course, most of the predictions are for the euro to continue gaining strength, partly because both in the economy and investments, inertia is a powerful force. In other words, people usually believe that what is- will continue to be,” says Mark Andersen, Senior Investment Strategist at UBS, told "Globes" in an exclusive interview.
During the past 12 months, the euro was up from $1.05 at the end of 2016 to around $1.18 today, a 12.3% increase.
And what do you expect to happen now?
“We believe the euro will continue to strengthen, but at a much slower rate, perhaps by single-digit rates, against the dollar. At the end of 2018, we expect the euro to be at $1.25. At the end of last year, everyone predicted they would be equal in value, but we, on the other hand, expected there to be a significant depreciation of the dollar against the euro.”
Andersen (38) joined the Swiss bank in 2006, and has been specializing in investment strategy and optimal portfolio diversification. He visited Israel earlier this month, holding meetings and presentations with institutional investors.
What type of growth do you expect the global economy to have in 2018?
“In the past few months, global growth has been gaining strength, which is very good for the stock markets, of course. Next year, we expect the strong growth to continue, and the global economy to grow by almost 4%. The growth is consistent among many countries that were in trouble, like Russia and Brazil, both of which are growing along with other economies, which are expanding beyond their potential.”
Aren’t you concerned about the debt level in China and in the world as a whole?
“China was one of the positive surprises of 2017 in terms of growth rate. We believe that in 2018, growth in China will slow down somewhat, to a level of 6.2%-6.5%, but will remain healthy. The debt level in China is extremely high, and they are well aware of it. That’s why they are carrying out various reforms. The positive aspect there is that almost the entire debt is local, and Chinese have a very high savings rate, so we are not that concerned about the debt in the coming year.”
The European economy is growing nicely
“That’s true. It’s the second year in a row that Europe has been growing faster than the US. There are European economies, such as Romania and the Czech Republic, which are growing faster than China and India. It’s amazing to think that the greatest growth can now be found in Europe, rather than in Asia or Africa.”
Do you believe that the relatively strong growth in Europe will continue?
“Currently, the growth rate there is around 2.5% per year, which is very high for Europe and much more than the long-term potential, which is approximately 1%. Much of this is due to the central bank's monetary expansion. At the moment, it certainly seems like the relatively high growth will continue into next year.”
Do you believe interest rates should be raised?
“I do. But that’s my opinion and not UBS’s. Draghi and the other leaders of the European Central Bank should have already decreased the monetary expansion and increased interest rates, just like the US did. But in Europe, they are mainly charged with making sure prices remain stable.
As long as the inflation is very low, they can continue with that policy
“That’s true. Again, it’s my personal view that their policy is wrong, i.e. - that they should stop the monetary expansion and begin raising interest rates, because bubbles are being formed, such as in the real estate market.”
Do you believe there is a bubble in European real estate markets?
“It is being formed these days, in certain European markets. There’s a price for having the interest rates at near-zero or even below zero for so long. But you need to remember that Europe and the US have very large real estate markets, which are divided into sub-markets, so there are areas where prices can be very high, while in others you can still get some ‘steals’.
“The economy is heating up so much that there are countries like the Czech Republic, Poland or Germany where it is very hard to find employees in certain industries.”
Where are the risks to the markets?
“There are political risks like North Korea. We have learned that it’s important to monitor political risks, but not to base investment decisions on the fear of one horror scenario or another being realized. In the past few years, the markets have been able to cope with a lot of upheaval, such as Brexit or Trump’s election.”
Are their economic risks?
“There is always the risk of an inflation outbreak, and if that materializes, it will adversely affect bonds, of course, as well as a big portion of the equity sectors.” In two to three years’ time, the US might go into recession, but we don’t believe that would happen in the coming year.”
Blockchain’s huge potential
In UBS, like in many banks and investment banks around the world, it is believed that stocks are still a preferable investment class, despite last year’s increases.
Is it really a good idea to keep investing in stocks?
“Basically, yes. In the present environment, stocks are the preferred investment class. We prefer European stocks over American ones, and are neutral on Japan. If you look at individual sectors, we prefer financial and technology stocks.
“We were very positive on high-yield bonds for a very long time, but we are currently advising to stay away from them, because they offer an unattractive yield to risk ratio. Data collection is growing exponentially, and will continue to expand at an immense pace in the coming years, so companies in the Big Data domain will continue to benefit from this trend in the coming years.”
What do you think about the Bitcoin phenomenon?
“People who invest for the long-term should try to evaluate the value of an asset according to its cash flows, for example, which you can’t do here. We have clients who like to go to the casino, and we have clients who invest in Bitcoin. It’s a very risky gamble, and you can lose all your money here very quickly. The blockchain technology, on the other hand, has a huge potential.”
Do you think central banks will start issuing their own digital currencies?
“That can definitely happen. And there’s also a scenario where some central banks - such as those of the US, Euro and Japan - will collaborate on issuing a single currency.
“That currency would be backed up by economies of countries with real value, and much less volatility. And it could deal a real blow to the Bitcoin, which is highly volatile and unstable.”
Published by Globes [online], Israel business news - www.globes-online.com - on December 28, 2017
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