The G20 summit in Brisbane, Australia sent some worrying signs on the world economy. As I was putting up this phrase, my wife gave me a wry look. Since the festive season is approaching, why not write about something’s that will give investors happiness and peace of mind. To some extent I agree with her but headwinds still remain as the world economy is still reeling in the aftermath of the financial crisis.
The reduced forecast for economic growth worldwide is an indication that some economies are still in the repair phase of the economic cycle. Stimulus package in Japan last month is an indication of weakness not strength. A possible third recession is teetering in the Eurozone area with falling growth, high unemployment and risk of falling prices. The Ebola epidemic in Africa, conflict in the Middle East and Russia’s illegal action in Ukraine are all conjuring up for a dangerous backdrop of instability and uncertainty.China recently cut its interest rate, an indication that it needed to re-boot its economy.
By contrast, United Kingdom, some Emerging market economies and the United States are showing some signs of economic equilibrium. United Kingdom is the fastest growing economy in the G7, with record number of new businesses mushrooming, fall in unemployment rate and rise in prices. Same momentum of progress is being observed on the other side of the Atlantic. In the Emerging economies, India is showcasing some improvements in the economic front. Falling crude prices, decelerating inflation, high end reforms and enhance corporate governance will boost support for economic revival. Furthermore, aggressive investment in both soft (education, health and skill) and hard infrastructure assets will be important for India to capitalise on its young demographics.
|MSCI Emerging Market||1.0%|
|MSCI Frontier Market||8.4%|
|MSCI South Africa||9.1%|
Through the years, equity markets around the world have responded excitingly to stimulus packages. The continued support of Central Banks has been very profitable for investors round the globe. However, it should be noted that these institutions should not be the only shoulder to play the policy game. They do not have the necessary tools to remedy the long term prospects of the economic engines. Government should boost infrastructure spending, labour market reforms as well as revival in investment cycle. In essence, collaboration on both fronts is needed to bolster economic future for the better.
In 2014 these unbalanced economic conditions in the world had a varying response on the equity markets. Not all markets have been showing hunky dory performance (see table). It provides reflection that the world economy will only get a boost when all the four wheels viz US, Japan, Emerging Markets and Europe turn efficiently and productively. Indian market has been the real show stealer this year with gains of 29%. US markets as well had a very good year in 2014.
The year-end is a great time for looking back, looking forward, and thanking all those around you for all they’ve done. Some investors have been quite happy with the way things have developed this year but that ebullience may trend downward over time if concrete economic decisions are not taken. Hopefully, Santa Claus will overhear the wishes of investors and shower good times so that there is a coordinated approach to uplift the world economy.
Merry Christmas and Happy New Year 2015 from the VIKASA Team.
By Devendra Seebaluck