Global fis­cal tight­en­ing could threaten eco­nomic re­cov­ery

Finweek English Edition - - Cover Story -

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

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