There is scope for earnings growth in 2014, which should drive global equity markets higher but investors should not expect a repeat of the 15 per cent annualised returns they have enjoyed since 2008, UBS predicts.

There is scope for earnings growth in 2014, which should drive global equity markets higher but investors shouldn’t expect a repeat of the 15 per cent annualised returns they have enjoyed since 2008, and returns are likely to halve to around seven to eight per cent, UBS predicts.

The wealth management arm of the Swiss firm, with a total of SFr1.7 trillion ($1.87 trillion) of assets, argues that valuations of equity markets have not yet been pushed beyond reasonable levels.

The firm, like many of its peers, is trying to figure out whether the rise in equities since the financial crisis of 2008 – fuelled in part by money printing by central banks such as the US Federal Reserve – can continue at its recent pace, particular if, or when central banks begin to turn off the monetary taps. Expectations that some of the worst financial news has now happened can be seen in the fall in the price of gold – a traditional “safe haven”, from its September 2011 record high above $1,900 per ounce.

In December, UBS is overweight both the US and the eurozone markets. It argues that strong private sector demand, especially through consumption in the US, should accelerate US real gross domestic product growth in 2014. UBS expects US real growth of 2.3 per cent annualised in the fourth quarter of this year. Meanwhile, growth in the eurozone will be at around 0.2 per cent in the quarters ahead, the bank said.

“Economic activity in emerging markets showed further signs of marginal improvement in October, a trend UBS forecasts to continue throughout December. Export-orientated countries are expected to do better than those driven by credit growth,” the bank said.

UBS said it expects stabilisation in the Chinese economy in 2014, and for its 2014 growth target to be changed to 7.0-7.5 per cent from 7.5 per cent currently.

The Zurich-listed firm said its preferences include US high-yield corporate bonds, which are fundamentally well supported; corporate hybrids, where UBS expects yield pick-up; and US financials, which have stronger balance sheets, more liquidity and better asset quality than their global counterparts.

On commodities, UBS noted that broad commodities have recently struggled, with price weakness particularly acute in precious metals. On gold, the bank thinks the yellow metal could fall further and it has a six-month price target of $1.15 per ounce. (Gold is currently fetching around $1,250 per ounce.

In the case of foreign exchange, UBS said the UK pound offers upside potential against the Swiss franc due to strength in the UK economy; it expects the Bank of Japan to counter economic weakness by more monetary easing in 2014 so it is bearish on the yen exchange rate against the dollar.