As we kick-start 2015, there are some key issues that are expected to dominate the macroeconomic environment. These will ultimately have an impact on financial markets around the globe.
The first trigger to have generated some feverish excitement among investors was the decline in oil prices below $50 dollars during the first week of January. The US markets were first on the hit list to be affected. Developed and Emerging markets followed suit and were also severely battered.
The swing of the dollar vis a vis the Euro (trading below $1.19) was another indication of the unbalanced economic interaction between the most powerful nations of the world. The underlying causes of this unbalance is quite straight forward. The economic conditions in US is faring much better than other advanced economies. This year, as Europe and Japan are pushing for more Quantitative Easing (QE), the US is planning to raise its benchmark interest rate in some foreseeable future. Europe is plagued by the exclusion of Greece from the European Union in addition to high level of debt, high unemployment and subdued growth. Japan is facing an uphill tasks to redress its economy.
The chi of growth and capitalism is also evaporating in Emerging Markets, except for a few. Russia is currently struggling because of the fall in oil prices led by a surplus of crude in the global market. The rouble has depreciated by 46% against the dollar in 2014. China is also struggling to cut the excesses in its economy since lower exports and asset bubbles are hampering growth. On the other hand, India may find a sweet spot if reforms announced by the new government are effectively implemented with a massive boost given to infrastructure spending. This manoeuvre will luckily have a stellar impact on Indian company’s earnings hence, increasing domestic demand. Additionally, India can also tap on its demographics power which may bolster new economic dynamism in the coming years.
The multi speed world economy has also had an impact in Frontier Markets. Apart from Tanzania, Kenya and a few others, most of the Frontier Markets were down on a year to date basis. Nigeria was down by more than 25% whereas Ghana was down by more than 20%. Most of the currencies in the Frontier Markets depreciated against the dollar.The most powerful tool for sparkling growth are not just creation of jobs and booming financial capital but additionally a suite of intangibles assets. The most common one is the establishment of national institutional framework. Unlike the US and China, Frontier Economies are not moving their economy from agriculture to manufacturing then to services, they are growing across all sectors of the economy.
Based on the current trend, the US is expected to return to past norms growth principally because of balance sheet repair undertaken by financial sectors. UK economy is also perceived as following the same trajectory. However, other developed markets are expected to struggle in reshaping their economy.
As far as the overall growth in emerging markets, except for Brazil and Russia, is concerned, indicators are quite optimist, so much as to surpass the growth in developed markets.
Frontier Markets are expected to have the same stagnating fate as in 2014 mainly due to the Ebola outbreak and other inherent characteristics of these economies.
If the global economic dynamics turn to be favourable, security market is poised to provide good prospects for investors and corporates.
The first bang in 2015 was the freefall of markets due to low oil prices. Such an unanticipated evolution has laid down golden opportunities for investment in countries like India… Hopefully, a second bang will bring even more cheers. Bang Bang 2015.
By Devendra Seebaluck