Global fiscal tightening could threaten economic recovery
INVESTORS CAN EXPECT lower growth for longer. That’s the view of Olivia Mayell, vice president of JP Morgan Asset Managers in London and one of the guest speakers at a recent Wealth Forum that was held at Nedbank’s Sandton and Cape Town offices.
Mayell says prevailing austerity in the global economy, which is a result of the recent economic meltdown, will continue to lead to low returns.
“Government debt is part of the problem,” says Mayell. “Global government debt is at levels close to where it was after World War II. In order to stabilise debt ratios, drastic debt cuts are required. That’s going to be painful and moreover, could threaten recovery. Stabilising debt ratios by 2030 requires a hefty fiscal tightening over a long period, averaging over 9% of GDP in the advanced economies. In addition, stronger trade in the private sector is needed, because unless there’s a recovery in private-sector demand to offset retrenchment in the public sector, the result of tightening could be renewed recession… or even depression.” She mentions Ireland where drastic cuts were made quickly after the meltdown, “but the real concern is that they don’t see the growth they had expected.” The question is how severe the changes must be to be eventually supported by growth.
But how does this relate to markets? “ This is one of the reasons markets seem to be so nervous at the moment,” she says. “Investors are at a pivotal point – waiting for the measures to take effect.” And still the question remains: When will the markets in fact start to reward investors again?
What is the reaction of investors to all of this? Mayell says globally equities are still relatively attractive and cheap compared to bonds. Market sentiment, however, tends to be negative. “Currently there’s apathy and investors are very worried about volatility.” Risk appetite has faded after its recovery in 2009. (See graph.) “Fund managers have reported that cash overweight positions have been increased, despite little or no evidence that the return on that cash is going to improve any time soon.” Mayell added that globally conventional investor behaviour has changed. “While the US and European markets were attractive in the past, there’s a strong movement towards emerging markets at the expense of the US and Europe.
“A combination of spiking equity volatility, extreme negative correlations between equity and bond returns, and deteriorating leading indicators has made it less attractive to make asset class decisions,” says Mayell. remain subdued due to slow global growth, relatively high interest rates, a strong rand, combined with an increasingly expensive and less productive labour force undermining export competitiveness, job losses, a highly indebted consumer and endlessly delayed public sector fixed investment spending.”
Janet Hugo, director of Hugo Capital, who chaired the Wealth Forum, said although investing in these uncertain times