The year so far
The first half of 2009 has proved to be a
rollercoaster ride for investors. By early March, the slide in
stock markets had continued in the same vein as the final quarter
of 2008, however, global markets rebounded strongly from this March
low to deliver their best quarterly performance in 20 years. This
reversal in trend was triggered by an improvement in a number of
leading economic indicators coupled with a general acceptance the
global financial system had stabilised from a state of near
collapse thanks to coordinated government and central bank
intervention. Emerging markets have staged the most spectacular
recovery, rising by 33.6% over the quarter, making it the best
quarterly performance for the MSCI Emerging Market ($) Index since
its inception in 1988. The equity markets in China and Brazil have
powered ahead, rising by close to 60% since the turn of the year.
Russian and Indian equities have also risen sharply, the former as
a result of its high correlation to the price of oil (up 57% to the
end of June) and the latter thanks to a strong showing by the
ruling Congress coalition at the general election held through
April and May. Capital invested in these markets during the quarter
has delivered tremendous returns, however, it is important to
remember legacy investments are still significantly underwater as
emerging markets still have some way to run to reach their previous
highs.
By contrast, the stock markets of the US, UK
and Europe have only returned to the levels they were at the turn
of the year, representing a significant relative underperformance.
Why should this be? The answer to this question lies in the
economic forecasts published in recent weeks by the OECD, World
Bank and IMF. In terms of global growth forecasts, economists at
the World Bank are more pessimistic than those at the OECD and IMF,
however, all three agencies are consistent in forecasting sub-par
growth in the developed world, but much stronger growth, both for
this year and next, in the developing economies of the world.
Having witnessed a period of increased synchronisation, this is now
disappearing, but for the first time, recovery is not being lead by
the US and other Western economies, it is, instead, being driven by
the East. Both consumer and capital expenditure have turned around
in China, India, Brazil, Indonesia and South Korea – such evidence
has yet to materialise in the US and Europe. Bank lending and the
flow of credit has picked up strongly in Asia and Latin America,
but still remains very weak across the G7 nations. Ironically,
second quarter earnings in the banking sector are expected to be
very strong, particularly in the US, as banks benefit from the
support engineered by central banks, together with the raft of
additional measures introduced to assist banks ease the pressures
on their balance sheets. The return of bank profitability in the US
is evidenced by the Treasury’s decision to allow ten banks to repay
TARP funds having successfully passed a series of stress tests.
This much improved performance by the banks is not, however,
translating into an improving economy as lending remains curtailed,
limiting credit to both the household and corporate sectors.
Perhaps the most striking contrast between the
East and the West is the state of their public finances and the
impact this will have on the continued ability of governments to
stimulate economic recovery. The huge growth in debt and falling
tax revenues have already been a catalyst for rating agencies to
downgrade sovereign ratings and voices of concern are being raised
over the credibility of repayment plans announced by governments in
the West – particularly the US and UK – against a backdrop of
future below-trend economic growth. In the East, recent budget
surpluses and rising foreign exchange reserves have left many
countries with a pool of cash which can be used to target further
increased public expenditure and stimulate domestic consumption,
and thus drive economic growth whilst the West continues to
falter.