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MENAFN - Arab Times - 02/02/2014

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(MENAFN - Arab Times) National Bank of Kuwait (NBK) held its annual seminar entitled "Global Markets Outlook for 2014" for its Corporate Banking customers at Sheraton Hotel last Thursday (30 January, 2014). The seminar was presented by George Richani, Head of International Banking Group at NBK. Richani elaborated on the main issues that governed the world economies and markets in 2013 and provided NBK Corporate Banking customers an insight into the global markets outlook for 2014 as well as the available investment opportunities. Richani explained the challenges of forecasting under those very unchartered and complex times. He clarified that the world is encountering so complex, so unorthodox and so inter-related issues and described how we are living in an intriguing time of historical proportions. Richani stressed that politics are now playing a major role in today's world and that politics and economics have become truly two sides of the same coin, impacting more than ever each other. "The critical situation also involves nowadays monetary and fiscal policies of grandiose and un-tried magnitude and impact that could lead to ramifications and repercussions that could not only affect the advanced world but could spread all over the universe," said Richani.

Global outlooks
He explained that Markets are inter-linked and policy errors in the US, China or Japan could lead not only to self-induced stagnation in those countries alone but could involve Europe and the Emerging markets as globalization takes hold. "Desperate times during the crisis required desperate measures by policy makers. Those desperate measures have helped the world and saved the banking system and avoided depression and resulted in some growth and optimism in the US for example. That said the Quantitative Easing in the US has punished savers and rewarded borrowers. Risky assets were helped and stock market investors benefited as their paper wealth increased" he said. "Now the danger lies in the addiction of policy makers and markets alike by the amounts of steroids that have been injected into the system. Withdrawal effects could be painful as the level of assistance by monetary policy makers in the west is reduced and the dose of medicine is lowered," he added.

Richani noted that the policy makers cannot be envied at this juncture. The Fed for example has used unorthodox ultra-accommodative policies that were never used before and there is no previous historical experience or playbook in the monetary policy world that could be relied on. In his forecasts, he saw that challenges facing the Fed are how to walk a fine line and have a balancing act in its exit strategy without choking off the nascent growth seen in the US lately. Richani also saw that there are constraints to exit smoothly and some of them are practical in nature and others are political. There is the danger of losing the independence of the Fed as and when market interest rates rise. Timing of the exit is critical and navigation is not easy as the Fed should have the capability to balance the risks of deflation and inflation going forward simply because the amounts involved in the Quantitative easing are too large.

"If the Fed reacts too quickly and exits the Quantitative easing too fast its haste could result in a deflationary bust and if it reacts too late and exits slowly, its slow response could result in high inflation," he explained. Richani clarified that the political issues and uncertainties in many countries this year could make the environment drag on for some time. The political space is filled with many challenging and changing issues in Europe and many emerging markets. The challenges facing the world need courageous decisions by policy makers and resilient markets to absorb their effects. He stressed that there is no escape from structural long-term reforms with whatever they carry in short-term pain. "This needs political will and stamina as well as far-sightedness and lack of political selfishness," he added.

Important Lessons
Richani also went through the important lessons that the markets should have learned well from the crisis relating relating to risk taking, redefining risk free assets, leverage, black swans, correlations, diversification, contagion risk, herd mentality and the new normal but it seems that humans and investors forget as always and they revert all the time to believing that this time is different. Richani explained that old habits die hard and that US consumers have in fact replaced their borrowing against their housing equities before the crisis with borrowings against their recent rising wealth in the stock market.

Eurozone crisis
Although big steps have been taken in Europe in 2013 and a Eurozone crisis was averted, Richani forewarned that Europe is not out of the woods yet. He went on to explain that unless the root causes of the problems in Europe such as lack of fiscal integration and banking union is handled well there will be no long-term solution to the problems facing Europe. Austerity measures alone have their own limitations and overly tightening the belt could be counterproductive to growth. "Europe badly needs a banking union. The European parliamentary election and the German elections this year are key milestones to the success of avoiding more downturn in Europe. Fear of deflation in Europe is mounting especially in the weaker countries of Europe such as France and peripheral countries," Richani did not rule out a possible muddle-through situation in all of Europe this year too.

Inflation
On global inflation, Richani explained that despite the deleveraging that happened in the aftermath of the crisis, the global economy continues to incur more debt and that the levels of debt in many countries run above the levels considered reasonable for sustained economic activity. For example, the US public and private debt amounted to USD 58.2 trillion, representing a massive 344% of GDP or 3.44 times the size of GDP, with government debt alone being above 100%. In Japan, the story is even worse, with the government debt well above 200%. He also explained that forced spending cuts and tax hikes kept inflation levels well contained in the US last year.

US Growth
As for the United States growth, he saw that growth figures have improved in the last few quarters and the stock markets have really done well. Richani saw better growth prospects in the US in 2014 as the impact of the sequester in the US will be felt less in 2014 than last year, and that the 2013 tax hike will be felt less in 2014 as more than half of its effect has already been registered last year. That said, he warned that we should move with caution as policy risks are high. Richani stressed that the US and the Western world should save more and the emerging markets should start to spend more. "The Chinese are taking measures to change their growth model from foreign investments and export-led growth to domestic consumption, but that is rife with risks. Growth in China going forward is now accepted as being lower than the previous years," he explained.

Monetary policy
As far as monetary policy is concerned, Richani believes that interest rates in the advanced economies will remain low for a long time to come because inflation is not a concern now. US long-term rate could rise from here as tapering increases but official Fed Fund rate will remain unchanged for quite a long time. Richani also dwelled on the efficacy of quantitative easing and he believes that its impact is diminishing with time. He saw that western banks have been faced with lots of penalties and provisions for loan losses have increased which somehow is impacting their ability to lend. Banks are also faced with new regulations regarding Basel III and this is forcing them to deleverage and seek capital. With respect to the FX markets, Richani expects that the US Dollar will benefit against other currencies especially against emerging market currencies that suffer from current account deficits, against the Euro and against the Yen in particular.

 






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