‘De-coupling’ of emerging economies from US slowdn
17 March 2008
Arcus positive about the ‘de-coupling’ of emerging economies from the US slowdown
Unique issues for New Zealand, however
The world should look to emerging economies and not the United States to help it through the current global economic slowdown, Arcus Investment Management says in its latest Quarterly Strategy Paper.
Weakness in the US economy sent the world into recession earlier this decade.
“This time, however, the growth of emerging economic giants China and India, and other emerging economies such as Russia and Brazil, are providing a major cushioning effect that is likely to be the difference between a global slowdown and a recession,” said Arcus Chief Economist Rozanna Wozniak.
Recent economic growth in India and China has been driven largely by internal consumption rather than exports, while high oil prices have been a windfall for Russia.
“We are in a very different market environment from the last global downturn of 2001, when equity markets in many parts of the world were overvalued. This time, many markets are reasonably priced and, in some cases, are cheap on an historical basis,” Rozanna said.
However she said that New Zealand is an exception.
“The local equity market hasn’t yet reached a point where it offers compelling value. While emerging economies, particularly those in Asia, are helping to underpin demand for our exports, many New Zealand companies are struggling to generate solid earnings growth. Demand is sluggish and cost pressures are significant, reflecting high oil prices, wage pressures and high generalised inflation.”
She said that while recent high levels of volatility are likely to continue, investors need to stay focussed on long term fundamentals.
“Although volatility can be disconcerting for investors, history shows that, given time, markets do recover. There have been 10 instances in the last 25 years where global share prices have fallen by at least 9% a month – the size of the fall in January this year – and in the majority of cases the recovery over subsequent years was pronounced,” Rozanna said.
“Even over a medium term timeframe, opportunities still exist for investors with diversified portfolios.
“One trend we are seeing is a switch in focus towards companies with strong earnings growth that are not strongly exposed to a cyclical economic downturn. Investors are no longer willingly buying companies just because they are cheap.”
The report said that while there are many unknowns about the flow-on effects of the ‘sub-prime contagion’, the fundamentals of companies in many parts of the world are still relatively strong and corporate debt levels generally low.