FYI | Jan 24 2008
By Chris Shaw
In what was a timely get-together given the current volatility in global financial markets Morgan Stanley last week held its annual Macrovision Symposium, from which it hopes to identify key macroeconomic themes for the year ahead.
Taking into account the views of the clients present at the get-together the broker’s conclusion is 2008 is likely to see a number of markets, particularly those in developed economies, re-couple with the US economy.
This is not such a favourable outcome as the consensus view was the US is already in recession, though there was little agreement as to the likely length and depth of the downturn.
The broker’s view is a mild recession with an upturn later this year is most likely and while a slight majority of participants agreed with this scenario others pointed to the fact downside risks remain even allowing for the latest easing in official interest rates.
Taking the view the downturn will be mild Morgan Stanley’s macro team expects short-term bear markets in both equity and credit markets globally. Those at the conference saw Europe as most likely to experience a re-coupling to the US economy given the restrictive monetary policy in place as the European Central Bank (ECB) continues to fight inflation and the fact the region is likely to suffer from spillover effects as the US slows down.
The broker is already forecasting below consensus EU growth this year, estimating GDP of 1.6% this year against 2.6% last year. The UK is not expected to fare any better, the broker forecasting GDP of 1.8% for the year against 3% in 2007.
However, it notes a number of participants at the conference took the view Europe is actually the weak link in the global story and the ECB’s focus on inflation will hurt more than it helps.
On the positive side the broker, along with a majority of participants, took the view emerging economies and markets are likely to continue to de-couple from the US and European economies.
The broker points out this doesn’t mean there won’t be an impact from a US slowdown in emerging markets, but the effect is likely to be less crippling than has been the case in previous US recessions.
Why this will be the case in the broker’s view is a number of emerging market economies have been able to reduce their reliance on exports and grow the level of domestic demand, while external and fiscal surpluses provide scope for stimulative policies to counter any slowdown.
In the case of China the broker’s opinion is the slowdown in Western economies will actually help cool the pace of Chinese growth, which should mean growth is more sustainable going forward.
Of importance to Australian investors given the economy’s position in world commodity markets is the fact metal and other commodity prices aren’t falling sharply, as this supports the broker’s view of emerging market de-coupling as if this wasn’t the case commodity prices would be far lower now.
In terms of how these trends will impact on asset allocation decisions the broker points out majority opinion at the conference was long positions should be concentrated on emerging markets and infrastructure while short positions be taken on European equities and cyclical stocks.
In other markets US debt appears attractive, while being long the US dollar against the euro and being short the British pound were also seen as good positions. There was also a view that being long agricultural commodities and short the metals was a worthy position for the year as a whole.
