Ranga Chand’s Notes on the Global Economy & World Financial Markets – December 2009
What’s in Store for 2010 – Some Observations
No Rapid Rebound from the Great Recession
Recent GDP data shows that economic growth, after falling precipitously for three or four quarters, has resumed in a number of the major economies including the United States, Canada, France, Germany, and Japan. As these economies have started to exit from the global recession attention has now turned towards assessing the underlying strength and durability of the recovery.
To be sure, aggressive monetary policy easing and the enactment of massive government stimulus measures have – finally – succeeded in turning around the economy. But on a going forward basis, as the stimulus winds down, the sustainability of the recovery will increasingly depend on a pick-up in household and corporate spending. The bottom line is that unless private sector demand kicks in, the recovery will be shaky.And here, unfortunately, the prognosis for 2010 does not look particularly good.
With consumers intent on paying down debt and corporate loan demand either flat or turning negative in several of the big developed economies, the de-leveraging process still has a long way to go. As a consequence, aggregate demand is expected to remain quite anemic. What this means is that an on-again/off-again recovery will likely plague the G-7 economies for a number of quarters. Policy makers who are expecting, or indeed banking, on a rapid and sustained rebound from the Great Recession are therefore likely to be disappointed.
Charity Begins at Home
Unless economic growth picks up smartly in the G-7 economies, the odds of which as noted above appear to be low, job losses will unfortunately continue to mount well into 2010. Confronted with rising unemployment and growing poverty levels the pressure will be on for governments to act and ‘do something’. And here, politicians will face an uphill battle in resisting calls for protectionism as a growing segment of the electorate will increasingly demand that ‘charity begins at home’. Already there are signs that governments are yielding to this call.
According to the non-partisan Global Trade Alert’s second report entitled ‘Broken Promises: A G20 Summit Report’ it found that between November 2008 and September 2009“…121 beggar-thy-neighbor measures have been implemented by G20 governments since last November. Every three days a G20 government has broken their no-protectionist pledge”.
For governments, already strapped for cash and with little room to maneuver on the economic policy front, 2010 promises to be every bit as tough and challenging as 2009. Maybe even more so. As the pressure mounts and populist anger begins to rise, we may be entering an era where politics trumps economics and governments start to put up the shutters to open markets and open trade. But, history shows that while protectionist measures may well serve as a short-term palliative, its effects are very deleterious in the longer run resulting in sub-par growth and diminished standards of living.
Global Stock Markets will be in Corrective Mode
Notwithstanding the severe fall-out in output and employment from the Great Recession, one of the hall-marks of 2009 is that, astonishingly, virtually every single stock market in the world posted double-digit returns. In the advanced economies, gains ranged from a low of 13.1% (to December 4) for Japan’s Nikkei 225 Index to a high of 29% for Australia’s All Ordinaries index. On the emerging markets front, equity markets in Indonesia, China, and India topped the leader board posting returns of 85.3%, 82.2%, and 77.3% respectively.
This naturally begs the question: can markets continue to climb after this spectacular run-up in stock prices or are they set to correct?While nobody can foretell the future, much will depend on the trajectory for economic growth and the stance of economic policy in the months ahead. Given that governments in North America and several European economies have indicated their intention to maintain the various fiscal stimulus measures through 2010 this should be a positive for equities, at least for the first half of next year.
On the monetary policy front, interest rates also are expected to remain low well into 2010 which will further lend support to the equity markets. Moreover, because there is so much spare capacity available, worries about an imminent break-out of inflation is clearly unwarranted. Indeed, if anything, should overall demand remain depressed there is a greater risk of deflation taking hold in the near term.
But that doesn’t mean to say markets won’t experience significant stress at times. Given the ongoing uncertainty about the robustness of the global recovery, I fully expect that markets will be punctuated with (mini and/or major) corrections along the way as it strives to move higher.
More Dubai-Style Debt Bombs Likely
The recent announcement by Dubai World – the investment arm of the United Arab Emirates – that it was seeking to delay payments on about $60 billion in debt shook global markets and is a wake-up call that there could be more such debt bombs lurking in the global financial landscape. As governments and companies in all regions of the world find themselves laden down with mountains of debt, Dubai World’s decision to restructure its debt and delay making payments has sharply focused the minds of investors.
The key concern here is that while it is generally accepted that central banks and governments will come to the rescue of distressed commercial banks, albeit with stringent conditions attached, there is no assurance that such support will also automatically be extended to heavily indebted companies that run into financial difficulties. Indeed, the UAE’s refusal to guarantee the debts of Dubai World is precedent setting and is forcing investors to re-assess the risks of holding corporate debt particularly from emerging markets. The risk of contagion of even a few corporations defaulting on their debt is the Achilles heel that could well roil markets in 2010.
Ranga Chand is recognized both domestically and internationally as one of Canada's leading economists and mutual fund analysts. Professionally, he held senior positions with Canada's Department of Finance, then served as a director of the Conference Board of Canada, before joining a major stock brokerage firm. He has also taught economics at the University of Waterloo, published extensively in the field of economics, and represented Canada at numerous economic forums, including the OECD in Paris, the United Nations, and the World Institute of Economics in Germany.
A media personality with a huge following, his popular television show "Talking Mutual Funds with Ranga Chand" aired weekly on Canada’s Report on Business Television (ROBTV) for three years from 2000 to 2003 and reached over 4.3 million viewers nationwide. Much in demand by organizations, industries, and associations throughout North America, Ranga is well known for his down-to-earth, clear, and informative presentations on the subjects of the global economy and investing.
He is the author of a number of best-selling books including:
Ranga Chand's Top 50 Mutual Funds
Ranga Chand's Getting Started with Mutual Funds
Best of the Best Mutual Funds, Featuring America's top 50 Heavy Hitter funds
Is Your Retirement at Risk? Winning Strategies for a Financially Secure Future.
Highly respected in the investment community, Ranga Chand is founder and President of the research and consulting firm Chand Carmichael & Company Limited, located in Ottawa, Ontario.
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What's in Store for 2010 - Some Observations
Dec 08 2009
What’s in Store for 2010 – Some Observations
To be sure, aggressive monetary policy easing and the enactment of massive government stimulus measures have – finally – succeeded in turning around the economy. But on a going forward basis, as the stimulus winds down, the sustainability of the recovery will increasingly depend on a pick-up in household and corporate spending. The bottom line is that unless private sector demand kicks in, the recovery will be shaky. And here, unfortunately, the prognosis for 2010 does not look particularly good.
With consumers intent on paying down debt and corporate loan demand either flat or turning negative in several of the big developed economies, the de-leveraging process still has a long way to go. As a consequence, aggregate demand is expected to remain quite anemic. What this means is that an on-again/off-again recovery will likely plague the G-7 economies for a number of quarters. Policy makers who are expecting, or indeed banking, on a rapid and sustained rebound from the Great Recession are therefore likely to be disappointed.
According to the non-partisan Global Trade Alert’s second report entitled ‘Broken Promises: A G20 Summit Report’ it found that between November 2008 and September 2009 “…121 beggar-thy-neighbor measures have been implemented by G20 governments since last November. Every three days a G20 government has broken their no-protectionist pledge”.
For governments, already strapped for cash and with little room to maneuver on the economic policy front, 2010 promises to be every bit as tough and challenging as 2009. Maybe even more so. As the pressure mounts and populist anger begins to rise, we may be entering an era where politics trumps economics and governments start to put up the shutters to open markets and open trade. But, history shows that while protectionist measures may well serve as a short-term palliative, its effects are very deleterious in the longer run resulting in sub-par growth and diminished standards of living.
This naturally begs the question: can markets continue to climb after this spectacular run-up in stock prices or are they set to correct? While nobody can foretell the future, much will depend on the trajectory for economic growth and the stance of economic policy in the months ahead. Given that governments inNorth America and several European economies have indicated their intention to maintain the various fiscal stimulus measures through 2010 this should be a positive for equities, at least for the first half of next year.
On the monetary policy front, interest rates also are expected to remain low well into 2010 which will further lend support to the equity markets. Moreover, because there is so much spare capacity available, worries about an imminent break-out of inflation is clearly unwarranted. Indeed, if anything, should overall demand remain depressed there is a greater risk of deflation taking hold in the near term.
But that doesn’t mean to say markets won’t experience significant stress at times. Given the ongoing uncertainty about the robustness of the global recovery, I fully expect that markets will be punctuated with (mini and/or major) corrections along the way as it strives to move higher.
The key concern here is that while it is generally accepted that central banks and governments will come to the rescue of distressed commercial banks, albeit with stringent conditions attached, there is no assurance that such support will also automatically be extended to heavily indebted companies that run into financial difficulties. Indeed, the UAE’s refusal to guarantee the debts of Dubai World is precedent setting and is forcing investors to re-assess the risks of holding corporate debt particularly from emerging markets. The risk of contagion of even a few corporations defaulting on their debt is the Achilles heel that could well roil markets in 2010.
© Copyright 2009 Chand Carmichael & Company Limited
AboutRanga Chand
A media personality with a huge following, his popular television show "Talking Mutual Funds withRanga Chand " aired weekly on Canada North America , Ranga is well known for his down-to-earth, clear, and informative presentations on the subjects of the global economy and investing.
He is the author of a number of best-selling books including:
Highly respected in the investment community,Ranga Chand is founder and President of the research and consulting firm Chand Carmichael & Company Limited, located in Ottawa , Ontario
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