KEY POINTS:
Better than expected global growth, plummeting oil prices, an appreciating US dollar, and the financial services sector quickly recovering from the sub-prime crisis are among a list of 10 possible "surprises" for the coming year compiled by Swiss banking giant UBS.
The list compiled by UBS' global economics,
asset allocation and equity strategy teams aims to "identify plausible scenarios, representing risks - up or down - to consensus investor thinking and, in some cases, to our own baseline views".
While UBS is forecasting global growth next year of 4.3 per cent and acknowledges that risks to that lie to the downside, company economist Andrew Cates said recent initiatives from central banks may do more than just alleviate the current liquidity problems.
"They could generate increased confidence and hence borrowing and spending.
"It is possible, although unlikely, that the US housing sector adjustment could proceed quickly, allowing for a sharper recovery in residential investment and a more resilient US consumer by the second half of 2008 than we presently envisage."
Cates also said global growth could possibly be boosted by firmer domestic demand in emerging economies.
On oil prices, Cates' colleague George Magnus said that aside from geopolitical issues and China's increasing demand for energy, the slowdown in the US and OECD economies could be sufficient to cause global oil demand to stabilise.
"It is conceivable, therefore, that oil prices, far from continuing to rise inexorably in a straight line, will be under some downward pressure in 2008, and perhaps to a new short-term 'equilibrium' level of around US$50-60 a barrel."
Meanwhile, although Cates says UBS expects the US dollar to remain under pressure over the short term due to sluggish US growth and further rate cuts by the US Federal Reserve, the impact of slower US growth could take its toll on other major economies.
That would prompt other central banks to decrease their rates, probably by the middle of the year, and decrease the yield differential between the greenback and other currencies.
UBS strategist William Darwin's recovery scenario in the financial services sector is particularly optimistic.
UBS itself last week announced US$10 billion in shock sub-prime writedowns , and the firm has cut its position on the financial services sector to neutral.
Darwin points out that valuations in the sector remain cheap, "but this is unlikely to matter much so long as uncertainties persist over asset values, write downs and the future of level of balance sheet gearing".
A bounce back by financials next year "could happen" says Darwin. "But that would also require the sub-prime affair to be among recent history's briefer and less toxic episodes of financial retrenchment."
10 surprises for 2008
1. Global growth on the upside
2. Oil prices plummet
3. The dollar appreciates
4. World trade clouds
5. Developed economy deflation/emerging economy inflation
6. Financials outperform
7. Emerging markets underperform
8. Japanese equities outperform
9. Equity volatility settles at lower levels
10. Chinese inflation falls sharply
