UBS forecasts economic growth will ease to 3.5pc next year Global economic growth is heading for a synchronised slowdown, led by China and the United States, and the corporate profit cycle is probably at its peak, according to UBS's deputy global economist Paul Donovan. He stressed, however, that this is a 'conservative outlook' rather than a projection of doom and gloom and suggests global growth will slow to about 3.5 per cent next year after reaching 4.5 per cent this year. 'Today, we are getting very good numbers coming through in terms of growth, but as we go into the third quarter with fiscal stimulus coming to an end [in the US] and the start of the tightening cycle from the Fed, the forces for a slowdown will become quite significant,' he said in an interview with the South China Morning Post. Also, the complete lack of consensus on three key questions - whether China will see a soft or hard landing, what will happen to oil prices and how quickly the Federal Reserve will raise interest rates - spells continued volatility across all asset classes, he said. 'As we go through the remaining six months of this year, we run the risk of effectively having a mirror image of what we had last year - the potential for bonds and equities to fall simultaneously,' he said. Asia is unlikely to escape the slowdown. In the long term domestic demand in Asia will play a larger role in terms of overall growth, but in the near term, the local parts of these economies are still to a large extent supported by employees of the export sectors, he said. At an investor presentation yesterday, the bank's chief Asian strategist, Sakthi Siva, noted that historically, Asia has been a cyclical play when it comes to equities, which would suggest investors should look to sell around now. For instance, the best returns from Asian markets have come between three months prior to the trough of industrial production in the 30-nation Organisation for Co-operation and Economic Development and 12 months after, and we were now in month 12, she said. Asia also tends to underperform in the first three to four months after the Fed starts tightening and is more exposed to higher oil prices and an economic slowdown in China than the rest of the world. 'But this cycle is different for three key reasons which override the negatives,' said Ms Sakthi, who is still bullish on regional stocks. The main reason, she said, was valuations. As a result of the market correction in the past couple of months these have fallen back from more than two times price to book - historically a sell signal - in February to about 1.65 times now. UBS's six-factor valuation model suggests Asian stocks are now 28 per cent undervalued. They look cheap on all six components, she said, noting a 20 per cent undervaluation equates to a 'buy' signal. Compared with previous cycles, Asia has also seen in a structural uptrend in return on equity since the Asian financial crisis and supply discipline has improved markedly in the same period with capital expenditure in relation to sales having fallen almost 50 per cent since the peak in 1997, she said. In their global model portfolio, UBS is neutral on equities but has moved from overweight to slightly underweight emerging Asia stocks.