The global economy may encounter a further sharp slowdown in 2009, while it may start to show a rebound in the second half of 2009, according to a UBS Wealth Management Research report published yesterday.

The report said most developed economies, including the US, Europe and Japan, will slip further into recession before a mild recovery sets in later in 2009. Emerging market economies are likely to slow markedly next year, but China, India, Brazil and Russia are likely to avoid an outright recession.

UBS Wealth Management Research noted that the global financial market has priced in a lot of bad news, while major categories of risky assets, including real estate, stocks and commodities, have posted sharp price declines in 2008.

"We hope the central banks' interest rate cuts will help bring a rebound in the third and fourth quarters of 2009. However, the global economy lacks a momentum for sustainable growth," said Pu Yonghao, managing director of Head Wealth Management Research Asia Pacific.

Pu also said corporate bonds are likely to deliver some of the strongest returns in financial markets in 2009, especially those less exposed to the overall economic weakness, for example, utilities, telecoms and consumer staples.

"We also prefer investing in some stocks which are relatively more defensive and have less earnings contraction, such as healthcare, consumer staples and telecoms," Pu said, adding that the stock market may show a rebound in the first half of 2009, before the global economic recovery.

Regarding the local market, Pu said Hong Kong shares may show difficulty in holding up at the 14,000 level, as the macroeconomic figures on the mainland remain weak.

"Hong Kong economy will experience a very hard time in the first half of 2009, during which the unemployment rate may soar above 5 percent," Pu said.

Pu thinks China's GDP growth may drop to 7.8 percent, while the central bank may further reduce interest rate by 1 percent.

"The future growing momentum on the mainland will depend largely on consumption. Therefore, the central government needs to put more efforts in stimulating internal consumption," Pu said.

The mainland property market can help boost the stock market and internal consumption, so the central government may announce more measures to boost the industry, Pu added.

Patrick Ho, director of Head Corporate Research Asia-Pacific, said UBS also favors investment in rural development on the mainland in 2009.

"We prefer investment in railways and telecommunication, which will benefit from the development of rural areas in China," Ho said, adding that rural development is likely to be the central government's long-term investment focus in the future.

(HK Edition 12/09/2008 page2)