The key questions posed by investors today
include; are we seeing the green shoots of recovery? Is this a
false dawn? Are we facing something in between? On the
downside it is apparent quantitative easing in both the US and UK
has yet to reduce corporate borrowing costs to a level conducive
with sustainable recovery. On this basis deflationary risks in the
period ahead remain very real. Moreover, the potential for an
extended fiscal boost is limited for many countries due to rapidly
deteriorating public sector balance sheets. Governments continue to
accumulate enormous levels of debt which will have to be serviced
and ultimately repaid. This will ultimately serve as a protracted
drag on public spending and consumer spending via the increased tax
rates that will inevitably follow. Whilst currently investors
have an appetite for this Government debt, there are limits as to
what markets will credibly accept. Mervyn King has already fired a
shot across Gordon Brown’s bow on this issue. Unemployment is
rising sharply, leading consumers to be more intent on saving and
repaying debt, rather than spending money on goods and
services.
Notwithstanding the above, the positive
economic news flow cannot be denied. The data released in the past
few weeks is supportive of the view this downward leg of the cycle
is stabilising. Some cyclical areas of the markets have begun to
reflect the likelihood of industrial improvement. Rallies across
emerging markets and the rise in commodities prices are indicative
of this. In the course of time government spending programmes will
create jobs and near zero interest rates will boost the housing
market as well as eventually stimulate a rise in household and
corporate spending.
These conflicting set of views help explain
why markets have been, and continue to be, volatile. From our
perspective we believe it is too early to say with any conviction
that the economic stimulus packages in the developed world are
working. Activity ‘feels’ weak and has continued to decline through
this first quarter. In the East, it appears economic growth is
still being delivered, however, at reduced rates and our long held
view remains that China, on its own, will not pull the world out of
recession.
Our hopes for this second quarter of 2009
are for further evidence the worst is over and the spirit of
economic and geopolitical togetherness engendered at the G20 is
maintained. Our fears centre around a banking system which remains
very fragile and a rising rate of unemployment which chokes
economic recovery and stokes social unrest in the worst affected
countries and regions of the world. On a global scale, the
evidence is that in real terms this has been the worst ever bear
market by a considerable margin. For now we suspect further bad
news will continue to depress markets for much of the remainder of
2009 and a sustainable recovery still looks some way off.