Growth in emerging markets during 2016 will remain subdued, but should improve to 4.3 per cent compared with 4.1 per cent this year, a report said, noting that they will be under pressure at a time of US interest rate hikes.

Emerging markets need to transition their growth drivers with a greater focus on structural and political reform and less dependence on investment, commodities, and cheap capital, explained the report titled UBS House View: Year Ahead 2016 and Years Ahead 2016 from UBS Wealth Management, a leading financial advisory.

Meanwhile, global GDP growth is likely to rise to 3.4 per cent from 3.1 per cent this year as emerging markets stabilize and consumer spending in developed economies increases modestly, the report said.

Mark Haefele, global chief investment officer at UBS Wealth Management and UBS Wealth Management Americas, said: "This world in transition will continue to challenge portfolio performance. Our experience shows that a well-defined investment strategy, regular portfolio reviews, and rigorous discipline in execution can help keep performance on track. We enter the year with the view that a modest acceleration in global growth will happen in 2016 and investors should be overweight equities."

Modest improvement in global GDP growth

The US economy should expand by 2.8 per cent next year compared with 2.5 per cent this year. The country must transition away from an era of zero interest rates, and from Barack Obama's presidency to that of his successor. Despite these uncertainties, the drag on US corporate earnings from a strong dollar and low energy prices should abate. Consumer spending should remain robust.

The Eurozone economy is likely to grow 1.8 per cent next year compared to the current 1.5 per cent. Growth in the UK should remain strong, repeating its 2.4 per cent performance. Beset by a migration crisis, Europe faces questions about monetary stability, and the future of the likes of the UK in its political union. Nevertheless, improving growth and ultra-loose monetary policy should support profits in the Eurozone, where we remain overweight equities.

Asian economies are expected to expand more slowly for the third consecutive year, mainly due to China's GDP growth dropping to 6.2 per cent. This is also the single biggest drag on global growth compared to this year. China is shifting from a manufacturing-led to a consumer-led economy, and from a state-directed to a free market, said Haefele.

 Both transitions will create some uncertainty over its growth path and the outlook for capital flows.

Stocks and high yield bonds should deliver positive total returns. Government bond prices are likely to fall while inflation, the oil price and US interest rates will all probably rise. Hedge funds are expected to deliver more favourable risk-adjusted returns in 2016 than in 2015, and for the asset class as a whole returns of 4-6 per cent are expected in 2016.

Long-term investment themes

Beyond 2016, long-term themes will continue to shape the investment landscape. A key example is worsening demographics in the US, Japan, Europe and China, which may constrain the outlook for financial assets in coming years and decades. Savings rates are likely to decline as the elderly draw on funds, reducing the glut of money that has buoyed markets. A smaller population of young workers could demand higher wages, igniting inflation and pushing up interest rates.

An aging population will also create opportunities in the healthcare sector. Earlier-stage cancer research is seen as particularly attractive for long-term investment, said Haefele.

Due to cancer's wider social implications, research in this area is particularly suited to impact investment, which aims to produce a defined social benefit as well as a financial return. - TradeArabia News Service