(MENAFN - Arab Times) National Bank of Kuwait, (NBK) Group Chief Investment Officer and Global Treasurer George Richani expects a period of low growth with an anemic recovery in the US, a technical recession in the UK, a struggling Europe, a suffering Japan and a sluggish performance in emerging markets.
The investors, he said, should look at ways to survive not to thrive and focus on strategies that ensure return of their capital rather than return on their capital.
Richani was speaking at the NBK's annual seminar under the title 'Global Markets Outlook for 2013' for its corporate banking customers at the Sheraton Hotel, Jan 13, 2013, in downtown Kuwait City.
Richani provided NBK corporate banking customers insight into the global markets outlook for 2013 as
well as the available investment opportunities.
He explained the challenges of forecasting under those very unprecedented transitional times, saying the issues facing the world markets today are so varied, so different and so interconnected.
"After the collapse of the credit market, the only long-term solution is turning the fat years into lean years by adopting austerity measures and long-term reform programs but this does not come without pain," said Richani. "The dilemma is that policy-makers are damned if they do and they are damned if they do not."
Gridlocks
He explained the political issues and uncertainties in many countries this year could make the environment drag on for some time. "The political gridlocks in Europe and the United States and the policy of partial solutions or kicking the can down the road has only averted immediate financial crises and saved the world from possible depression but postponed the inevitable pain that is needed for corrections to make their way into the economy," he said.
Richani also went through the important lessons that the markets should have learned well from the crisis relating to risk taking, redefining risk free assets, leverage, black swans, correlations, diversification, contagion risk, herd and 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 explored the interconnectedness of the sovereign debt crisis, the banking crisis especially in Europe and the economic slowdown. He also explained, in detail, how unprecedented problems need unprecedented solutions.
Although big steps have been taken in Europe in 2012 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 competitiveness divergence between core and peripheral Europe and productivity differences is not handled there will be no solution to the problem. Austerity measures alone have their own limitations and overly tightening the belt could be counterproductive to growth.
As for the United States, he saw that growth figures have improved a little in the last few months and the stock markets have relatively done well. But he looked at the long-term prospects of the US and saw fundamental unresolved issues in the US such as the huge debt burden, the unfunded entitlement liabilities, the political brinksmanship and gridlocks, and the demographic time bomb of baby boomers coming to the retirement age in the next two decades. That said, he saw no immediate replacement to the US as safe haven.
On US debt, he stressed, the American government borrows around 40 cents and taxes 60 cents of each dollar it spends. Worse still, the 60 cents in tax revenues only cover mandatory entitlements and the 40 cents that the US borrows completely goes to finance discretionary spending including armed forces. This is definitely unsustainable in the long run.
As far as monetary policy is concerned, Richani believes that interest rates worldwide will remain low for a long time to come because inflation is not a concern now but recession and deflation are, and because the major Central Banks led by the Fed vowed to keep rates low until employment rate comes down to 6.50 percent and expected inflation between one and two years do not rise above 2.50 precent.
Richani explained how 5-year and 10-year US real rates have turned deep into negative territory during 2012. He also explained the quantitative easing has in effect allowed the Fed to buy Treasury debt to finance a good portion of US government deficits at no cost.
The Fed rebate (gives back) the interest it receives on its holdings of Treasury bonds that it purchases in the Quantitative Easing (QE) program, which in effect allows the US Treasury to borrow money freely.
Richani also says the impact on QE on the real economy is not significant yet. This is simply because the fundamental weakness is due to de-leveraging and due to the fact that banks are hoarding cash and reserves and not re-lending it to the real economy and also because the consumers are not yet fully de-leveraged - you can take the horse to the water but you cannot force it to drink. The new regulations regarding Basel III is not helping either.
Weaknesses
On the European front, more than a decade into the creation of the Eurozone, Richani sees that the original objective has not been achieved. To the contrary there are more divergences now than there were in 1999 when the Euro came into existence. This crisis has definitely revealed the main weaknesses of the Eurozone and that is the fact that you cannot have a monetary union without having a fiscal union, banking union and political union.
In his forecasts, he sees more short-term pain in the coming years before long-term gain could be achieved in a sustainable manner. The debt of the past should be totally unwound and this would take long time. Austerity measures and belt tightening in the western world would be the main headwind facing those economies and therefore we could see below two percent growth in the US and possibly below one percent, if not recession in Europe during in 2013.
Richani explained the new normal that is much talked about these days could entail issues such as acceptance of lower global and developed markets growth, acceptance of reduced return, importance of return of capital, divergent world, shift of power from west to east, more uncertain world, more, regulated financial markets.
He stressed that although the Central Banks have saved the world from deeper problems in the short term, the more unconventional monetary policies carry big long term risks. Richani expects a period of low growth, where he sees the US witnessing an anemic recovery, the UK a technical recession, a struggling Europe, a suffering Japan and a sluggish performance in emerging markets.
"The fortunes of the USD will depend on the situation in Europe. If the situation settles, the USD will come under pressure. But he expects, the European crises would continue in its muddle through as politicians continue to kick the can down the road.
He expects US official interest rates to stay low for some time to come. Policy mistakes could be the biggest risks going forward, and he expects a bumpy road ahead.
Richani advised that investors should look at ways to survive not to thrive, and to focus on strategies that ensure return of their capital rather than return on their capital. Real assets could find a place in the portfolio of most investors going forward.
