Low growth seen for global markets in 2012
Kuwait, January 14, 2013
An anemic recovery in the US, a technical recession in the UK, a struggling Europe, a suffering Japan and a sluggish performance in emerging markets count among the global markets outlook for 2013, said an expert.
The issues facing the world markets today are so varied, so different and so interconnected, added George Richani, NBK Group chief investment officer and global treasurer.
He was speaking National Bank of Kuwait’s (NBK) annual seminar entitled “Global Markets Outlook for 2013” for its corporate banking customers at Sheraton Hotel yesterday (January 13).
“After the collapse of the credit market, the only long-term solution is turning the fat years into lean years by adopting austerity measures and long-term reform programs but this does not come without pain,” said Richani. “The dilemma is that policy makers are damned if they do and they are damned if they do not”.
He explained that the political issues and uncertainties in many countries this year could make the environment drag on for some time.
“The political gridlocks in Europe and the US and the policy of partial solutions or kicking the can down the road has only averted immediate financial crises and saved the world from possible depression but postponed the inevitable pain that is needed for corrections to make their way into the economy” he said.
Lessons from crisis
Richani also went through the important lessons that the markets should have learned well from the crisis relating to risk taking, redefining risk free assets, leverage, black swans, correlations, diversification, contagion risk, herd mentality and the new normal but it seems that humans and investors forget as always and they revert all the time to believing that this time is different.
Richani explored the interconnectedness of the sovereign debt crisis, the banking crisis especially in Europe and the economic slowdown. He also explained in details how unprecedented problems need unprecedented solutions.
Although big steps have been taken in Europe in 2012 and a Eurozone crisis was averted, Richani forewarned that Europe is not out of the woods yet. He went on to explain that unless the root causes of the problems in Europe such as competitiveness divergence between core and peripheral Europe and productivity differences is not handled there will be no solution to the problem. Austerity measures alone have their own limitations and overly tightening the belt could be counterproductive to growth.
As for the US, he saw that growth figures have improved a little in the last few months and the stock markets have relatively done well. But he looked at the long-term prospects of the US and saw fundamental unresolved issues in the US such as the huge debt burden, the unfunded entitlement liabilities, the political brinksmanship and gridlocks, and the demographic time bomb of baby boomers coming to the retirement age in the next two decades. That said, he saw no immediate replacement to the US as safe haven.
As far as monetary policy is concerned, Richani believes that interest rates worldwide will remain low for a long time to come because inflation is not a concern now but recession and deflation are, and because the major Central Banks led by the Fed vowed to keep rates low until employment rate comes down to 6.5 per cent and expected inflation between one and two years do not rise above 2.5 per cent.
On the European front, more than a decade into the creation of the Eurozone, Richani sees that the original objective has not been achieved. On the contrary there are more divergences now than there were in 1999 when the Euro came into existence.
This crisis has definitely revealed the main weaknesses of the Eurozone and that is the fact that you cannot have a monetary union without having a fiscal union, banking union and political union.
In his forecasts, he sees that could be more short-term pain in the coming years before long-term gain could be achieved in a sustainable manner. The debt of the past should be totally unwound and this would take long time.
Austerity measures and belt tightening in the western world would be the main headwind facing those economies and therefore we could see below 2 per cent growth in the US and possibly below 1 per cent, if not recession in Europe during in 2013.
Richani stressed that although the central banks have saved the world from deeper problems in the short term, the more unconventional monetary policies carry big long term risks.
Richani expects a period of low growth, where he sees the US witnessing an anemic recovery, the UK a technical recession, a struggling Europe, a suffering Japan and a sluggish performance in emerging markets.
“The fortunes of the USD will depend on the situation in Europe. If the situation settles, the USD will come under pressure.”
But Richani expects the European crises would continue in its muddle through as politicians continue to kick the can down the road.
He expects US official interest rates to stay low for some time to come. Policy mistakes could be the biggest risks going forward, and he expects a bumpy road ahead.
Richani advised that investors should look at ways to survive not to thrive, and to focus on strategies that ensure return of their capital rather than return on their capital. Real assets could find a place in the portfolio of most investors going forward. – TradeArabia News Service