(MENAFN- Arab Times) In a closed session for its analysts and investors in Kuwait, KCIC, an investment firm focused on investing in Emerging Asia, hosted Richard Gibbs, the Chief Economist and Global Head of Economic Research at Macquarie Group, a leading global provider of banking, financial, advisory, investment and funds management services.
During the session, Gibbs shared with the local business community Macquarie's outlook on the global economy and investment environment in 2012, and delivered an analysis and insights on the current global economy situation and the financial crisis risks that are hindering the recovery, he said: "We are going through a natural credit crunch."
Eurozone:
Gibbs presented three plausible scenarios for the Eurozone indebtedness:
1. Orderly Rationalisation of Euro Zone: heavily indebted Euro member states would exit the currency union, and would experience Euro devaluation that will boost competitiveness, while stronger core members will face appreciation that will reduce competitiveness, and risk currencies will fall due to flight to quality.
2. Crash-through and mutualise debt: Indebted stats remain in the EU, and Euro policymakers will mutualise debt. AAA-rated Euro assets would benefit in near term as the Euro currency depreciates, and would boost competitiveness. Commodities and risk currencies would rally, credit and spending would expand.
3. Everyone for themselves and financial autarky (this would be the worst possible scenario): Countries would opt for a national introspection/protectionism, which would damage regional trade/capital flows, and exacerbating deflationary forces. The global crisis contagion would encourage countries to adopt a protectionism policy. Long term risk currency assets would outperform which means greater share of global trade flows, but short term flight to quality.
Global outlook:
Financial markets in 2012 are increasingly characterized by rapid risk reversal and counterparty disengagement. Social unrest and civil dislocation remain a risk as global unemployment rates remain persistently high, and living costs continue to rise in many regions.
Globally, Gibbs said that the European sovereign debt crisis is yet to be resolved, and bank deleveraging will still have a negative multiplier effect on the Eurozone economy. In Spain, concerns of a systemic risk of default are increasing as funding costs remain volatile.
In the US, the rise in energy prices remains a risk for its economic recovery, although the prevalence of shale gas is steadily eroding the US's energy dependence.
China in the other hand, a hard landing is not expected because the economy is decoupling from its reliance on the property sector and is moving more to depend on consumption which remains resilient. Gibbs added: We believe that China is positioned for a soft landing, monetary conditions are easing when compared to a year ago, however policymakers remain fixed on tight policy for the time being."
The global business cycle displays many shades of grey and dismay for the European Union (EU), the US and Japan.
The EU periphery is at the lowest point of the economic cycle hit by a recession, while the UK, EU core countries, Japan, and the US face better economic growth in their recession phase. The graph also shows Japan and the US moving towards an upswing. Gibbs said: "Japan entered a recession following the tsunami in March 2012, after which the reconstruction took 12 months. While the US economy is suffering in terms of income as 42 million people live on food stamps right now, with unemployment rates reaching 8.1%."
The rest of the world is on the other side of the graph, resembling the slowdown phase of the cycle. East Asia has the highest economic growth, followed by South East Asia, then the GCC, Latin America, India, China, and Australia coming last. "We see a slowdown in China, but we believe it's an intended slowdown. The banks were instructed recently to increase their lending, China is easing" Gibbs added.
US:
Gibbs said that the US is expected to continue growing albeit at a sub-trend pace. "Despite the currency and the weakening manufacturing sector, the US economy is expected to keep growing. People in the US don't have the mobility they had before, they have negative equities that they can't sell, and they find themselves stuck in their places." The US's further monetary stimulus will be directed at bolstering the pivotal housing sector.
GCC:
Strong growth continues in the GCC with governments' healthy finances. Growth in oil exporting countries will be supported by buoyant global demand as the GCC compensates for declines in the production of oil from other countries. This strong growth in oil output has also assisted governments in achieving robust budget surpluses.
"Interestingly enough, the non-oil GDP is what drives growth in the GCC", pointed out Gibbs. In 2011, non-oil GDP has outperformed oil-driven GDP, and the trend is expected to continue throughout 2012. Gibbs said, "The chart would look even more impressive if KSA and Qatar were removed."
Investment sentiment:
The investment themes continue to be dominated by defensive strategies. The focus now is on equities offering sustained attractive dividend yields, with long positions in 'safe haven' assets of short to medium duration.
The balance of risks for 2012-2013 has four risks, each has its weighted probability:
1. 50% probability: Liquidity driven surges in activity characterized by divergent and volatile growth in major economies, a fragile business and consumer confidence, volatile asset markets with low turnover, sustained low official interest rates and unstable commodity prices
2. 25% probability: Flat-lining with deflation driven by low sub-trend global growth, stagnant to weaker asset markets, depressed business and consumer confidence, historically low interest rates and bond yields, and deflating commodity prices
3. 15% probability: Coordinated global reflation where we see a strong above-trend growth, reflating asset markets and high turnover, buoyant business and consumer confidence, normalising interest rates and rising commodity prices
4. 10% probability: Global financial crisis mark II.
Commodity:
Gibbs said that Emerging economies will remain the engine room of industrial production, and specifically Asia countries, which are forecast to register a 7% in production in 2012. Production will be supported by increased demand thanks to four main drivers comprising:
n Industrialisation of major developing economies
n Rapid urbanisation in major developing economies
n Technological advances in production and consumer markets
n Psychology of fear in respect to perceived disruptions to our shortages of supply (especially energy and food), which increases demand for commodities.
China's share alone of metals consumption is growing fast, as seen in 2011 in comparison to 2008. Trend is expected to continue in 2012.
Commodity prices also reflect demand trends. Oil prices continue to reflect solid demand fundamentals as well as geopolitical risks. Macquarie forecasts prices to remain in the USD100-120 margin until 2014. Sustained high prices are part of a commodity type trend where Gibbs says, "non-fuel commodity prices typically experience linger bouts of downswings, whereas crude oil prices experience longer bouts of upswings."
On the other hand, drivers that would negatively affect demand, and drive it to a decreased are a fixed capital formation and refurbishment in advanced economies and the adoption of sustainable economic development policies.
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