The bull market for stocks is already in its ninth year © FT montage
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How high can equity markets go?

It is one of the biggest questions investors face. The bull market for stocks is already in its ninth year and has taken stock indices around the world to record highs.

In its preview of the year ahead, UBS describes the global economic recovery as “unusually broad-based” and points to its accelerating pace, which also comes with subdued inflation.

“There is little from a macroeconomic perspective to suggest an elevated probability of a major drawdown in 2018,” says Suni Harford, head of investments at UBS asset management, in its Panorama publication.

“Equity valuations, while full on some measures, remain compelling versus bonds. Earnings growth forecasts have been rising, not falling. Importantly, having largely completed the process of deleveraging, bank balance sheets are in much better shape than they were before the last recession.”

The Swiss bank does not think that tighter monetary policy poses too much of a risk, since the process is expected to be so gradual.

But there are areas to watch.

“If there is major disruption coming in global equity markets in 2018, we ascribe a greater probability to an abrupt reversal of the sustained outperformance of growth sectors over value sectors in developed markets since 2008 than to a significant drawdown,” says Ms Harford.

michael.hunter@ft.com

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