Jan 12 2009
With 2008 fast fading into the distance, investors will be looking to the new year for solutions to the economic crisis. Central banks have made massive cuts in interest rates, bringing many down to those only seen in the immediate post-war period. Government rescue packages, leading to billions of pounds worth of debt, seem like they will need more cash injection and the US re-honed the direction of the Troubled Asset Relief Programme. The global economy is tightening and at a fairly rapid rate, with recessions likely in the US, UK and Europe. In Asia, China has pulled at the purse strings, releasing a raft of rescue measures.
The big question for the coming months will be: will these measures work? To quote a man quickly becoming regarded as one of the best orators on the global stage, president-elect Barack Obama asked whether the banks had run out of ammo after committing to sizeable reductions in interest rates? As rates look set near zero what will their governing bodies be able to do next?
One extreme measure touted by JP Morgan in December was a restriction on the movement of capital. This followed a line of capital limitations, such as the dramatic closure of stock markets in Russia and India, regulation of short-selling and changes for banks concerning the holding of government bonds.
Threadneedle puts its faith in US president-elect Obama's political currency. It has revised down a potential two per cent contraction in gross domestic product to 1.5 per cent on the back of early announcements made by the new US leader. Mr Obama has already intimated plans to generate more jobs in the US to stem the flow of unemployment benefit claims during a period of redundancies. "The outlook for further economic activity has weakened further," the BBC reported from a Fed statement. With the Barack administration having commented the banks were "running out of traditional ammunition", it remains to be seen what could make up the next stage of the rescue measures.
The personal cost of the crisis came with news of the death of French investment banker Rene-Thierry Magon de la Villehuchet, 65, who was found at his desk with both wrists slashed. He was believed to have invested £1 billion in what could be the biggest case of fraud in the US. It involved the alleged unscrupulous shuffling of money by former chairman of the Nasdaq stock exchange Bernard Madoff, who used investment in one fund to pay off underperforming investments in another. Fraud is expected to rise as businessmen and women become increasingly unable to contemplate life with dwindling liquidity, lending and lower earnings.
Large enterprises with reserves look likely to fare better than those that rely on income. The Asian class of 1997 might have nest-eggs following the learning curve initiated from the banking errors of the era that cost countries dearly. People are still counting the cost of losing their homes today as bankrupt builders failed to honour escrow account payments, but firms that rely on foreign input may be in for a shock, JP Morgan said.
China has attempted to shore up a positive performance for the new year, aiming for growth of seven per cent over a prior target of double-figures, by introducing a stimulus package worth 18 per cent of gross domestic product over the next two years, Threadneedle said. It also introduced banking regulations, to allow financial institutions to fund mergers and acquisitions for the first time.
Barings noted comments from a member of the governing council of the European Central Bank Juergen Stark who said there was "limited scope" for further rate cuts as the institution deliberated the benefits of reducing official rates in the Euro area below two per cent. The news came as the Swiss National Bank lowered its interbank lending rate by 0.5 per cent after a one per cent cut weeks prior, leaving the figure resting at 0.5 per cent. Meanwhile the German economy was predicted to contract by 2.2 per cent while France actually constricted by 2.7 per cent in October on lower industrial output. The International Monetary Fund was simply fighting fires with Iceland and Hungary, remarked Threadneedle, while the UK was solidly quagged in the mire with manufacturing down two per cent in the three months to October from the previous quarter and industrial output down 1.8 per cent, Barings said.
Deflation was becoming more of a concern than inflation on lowered rates, Threadneedle pointed out, with more cuts expected. The report noted countries using currency exchange rates in a war of "beggar thy neighbour" would not be able to work for everyone, with the US in a very weak position of late. Indeed, there have been more enquiries from tourists about flying into what used to be one of the world's most expensive capitals, London in the UK, for the New Year's Eve celebrations with Skyscanner, as Sterling got cheaper for most on the back of a poorly performing exchange rate.
Emerging economies like Brazil appear to be performing well, despite all the gloom, with BARINGS reporting that the central bank in the country had kept rates unchanged and that the economy had grown 6.8 per cent on the previous year. However, there had been fiscal stimulus in the country, added Threadneedle in its overview.
Speculators should think twice about grouped investments, according to JP Morgan, with equities looking so volatile that the outcome of purchasing what appears to be a 'bargain' is anyone's guess. However, it appeared more share issues were likely to raise capital, spelling bad news for dividends, the investors said.
The general consensus going into the new year has been a rash of warnings to central banks debating whether to go further towards zero per cent interest rates. However warnings are all well and good, but what are they without solutions? 2009 needs more innovation and less condemnation for the best shot at recovery in the global economy.
