The last eight weeks has seen a whirlwind of sovereign downgrades, collapsing economic data and stumbling politics across developed markets.
Unsurprisingly, markets have suffered. We have gone from a consensus of muted recovery to one of possible double dip. Economic growth and corporate earnings have seen waves of downgrades too. The new reality has yet to be revealed. In this context, we look to extricate ourselves from the maelstrom and look for concrete measures, be they whole economy or stock and sector specific, that help us to establish our own views on the macro context and the best investment opportunities on offer.
I do not propose to scavenge over the carcass of August's equity market. It would have been nigh on impossible to avoid the waves of fear and volatility that dominated every newspaper and television screen. Suffice to say that everything that could go wrong, did. Rather than go over it all again, I think it is more helpful to identify and discuss outstanding issues. Predominant amongst these is the debate about where we are heading. Investors and analysts have been grappling with the unknown in trying to ascertain the scale of growth downgrades that are required. At the more bearish end of expectations, Morgan Stanley now forecast global GDP growth of 3.9% in 2011 and 3.8% in 2012, down from 4.2% and 4.5% respectively at the start of the year. Interesting to note, that contained within these numbers are forecasts for developed markets (+1.5% developed market growth for 2011 and 2012) that do not involve recession. Other attempts have focussed on the need to benchmark against the 2008 experience. We think there are fundamental differences between the starting point now versus then, that make that comparative invalid.
Firstly, monetary conditions differ materially. Current, strongly negative real global interest rates (3 months - core CPI) at around -1.8% contrast with the far more restrictive backdrop markets faced heading into the '08 recession. Analysis of previous recessions by Credit Suisse suggests that the average real global interest rate stands at 1.7% at the onset of recession, again significantly more restrictive than now.
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