The investment environment has been clouded by the spreading European sovereign debt crisis, sluggish US growth and the lack of effective policy. Emerging markets, on the other hand, are seeing strong growth. Rising inflationary pressure and overheating remains a concern, however. As Richard Jerram, Chief Economist of the Bank of Singapore, pointed out at the Morningstar ETF Intelligence conference, without stimulative policy measures, the developed economies are in danger of stagnating. Global growth will, consequently, be driven by Asian economies, but the risks now are greater and more numerous than before.
Economic data attests that the US economy is struggling, stifled by politics and regulation, and cautious consumer spending is weighing on US growth. Even so, Richard Jerram expects the US to avoid a double-dip recession, with falling energy prices and Japan’s supply chain providing optimism amid the gloom.
Too early to say that the worst is past
Europe is in deep distress, with the deepening of the sovereign debt crisis putting the political viability of the European Union at risk. Richard Jerram feels it is too early to say that the worst is past, until we have seen the impact on Europe’s financial system of the sovereign default and policy responses. With the growth of Europe driven by Germany, where there has been significant economic reform over the past decade helping to support growth, Richard Jerram points out, “Germany is only one-quarter of the Eurozone economy, so attempts to improve dynamism in other major economics such as France and Italy would also help.”
Expressing cautious optimism, Jerram expects Asia to propel future global growth based on the broad-based growth of emerging markets. “The focus tends to be on the larger economies, such as China”, but he warns of an unbalanced recovery fraught with uncertainty within the emerging markets.
Investors should be relatively cautious
Jerram suggests that investors should take a relatively cautious approach because of the numerous tail risks. “I do not think the three main concerns have changed much in the past few months: can the US economy achieve trend growth; how can Europe stabilize its sovereign debt problem; and can Chinese achieve a soft landing for its economy.” His key concerns include: 1) an eventual sovereign default by some of the troubled European Union members; 2) oil prices are likely to remain volatile, given the rapid global growth and unstable MENA politics; 3) the uncertain effects of the experimental QE2 policy; 4) persistent risk of distortions arising from varying levels of liquidity and bubbles; and 5) overheating of Asian economies.
