The U.S. and European economies will lose steam, but Asia will post solid growth rates, according to a new study by UBS Wealth Management Research.

UBS analysts have been predicting a U.S. slowdown for over a year, and now believe that this scenario is materializing. Looking into 2007, UBS analysts expect slower U.S. growth than most other economic forecasters.

“While the world’s other major economies will be affected by slower U.S. growth, their own domestic demand should continue to drive global growth,” it says. “In this challenging economic environment, investors will become more aware of risks; any disappointing economic news, or political events, may lead to temporary market corrections.”

In Asia, 2006 has been another vintage year. Equity markets are up more than 25% year-to-date, and economic growth will likely surpass last year’s level. It notes that while UBS analysts expect a slightly rougher environment ahead in 2007, they do not think the current slowdown in the U.S. economy will derail the Asian economic train. China and most other countries will slow down as export growth moderates, but a pick-up in domestic demand will compensate partly.

UBS analysts also expect the revaluation of Asian currencies, which started to gain speed in 2006, to continue in 2007.

For, Europe, the outlook is less favorable Economic growth accelerated strongly in 2006, helped above all by a recovery in investment expenditure, UBS notes. “ The recovery has broadened in the course of 2006 and the conditions are in place for a continuation of the upswing in 2007. However, the policy-mix is becoming less favorable for continuing growth, owing to higher interest rates and tighter fiscal policy in particular. Combined with the cyclical deceleration in the U.S., these factors should put a temporary dampener on Eurozone growth in 2007.”

In spite of a slower U.S. growth rate, UBS analysts see positive prospects for stocks over the next two to three years. “While corporations may find it more difficult to expand their profits, an outright earnings contraction appears unlikely,” it says. Moreover, UBS analysts estimate that equity valuations are broadly fair, making equities attractive over the next two to three years.

In the view of UBS analysts, the broad equity market should be able to withstand next year’s tougher investment environment. Equities have the potential to outperform bonds. Investors are advised to remain committed to equities, in accordance with their long-term portfolio goals.

The expected slowdown is predicted to increase pressure on high yield and emerging market bonds. “These segments performed well during the last year, but the environment has changed and further improvements in credit fundamentals are unlikely,” UBS says. “These bond segments are now expensive and investors need to understand that exploiting the yield pickup over high-grade bonds will become riskier in 2007. As government bonds are also unlikely to significantly outperform cash, bond investors will have to be more selective in their choices in 2007.”

While financial market performance may moderate in 2007 compared to 2006, the coming year also offers attractive opportunities for investors, UBS adds. “The still-solid market fundamentals suggest that market corrections should provide interesting opportunities in equity markets. In spite of a slower U.S. growth rate, UBS analysts prefer U.S. and European equities to other stock markets.”