FYI | Jun 04 2010
By Greg Peel
There has been an unsettling amount of bad news hitting global financial markets this year, with the European Crisis at the forefront. A recession is now likely in Europe, while at the same time China is attempting to slow its own economy. US economic data have been strong of late but the housing market remains an issue, particularly given government stimulus has now expired. In Australia, the RSPT is hanging over the resource sector.
All of it adds up to what might be a so-called “double dip” recession, or at least slowdown, in the global economy. Global forecasters such as the IMF are not predicting such, but then they've never been right anyway.
This is enough to put the fear of God back into the investment community. However, Citi's global equity strategists suggest there is no reason to be overly panicked.
Citi suggests the concern over global liquidity is overdone. Instead, it is global leverage markets should be concerned about. While the situation in Europe is likely to be controlled the risk is that the fear generated leads to further (or renewed) deleveraging of balance sheets by corporations which will choke off the growth recovery and threaten a double-dip from that perspective.
But Citi notes it's a different story for corporations heading into a second downswing than a first, and history backs up that claim. The GFC represented the end of a growth cycle and occurred at point that corporates were “bloated” with costs. If we are to go into another downswing, it must be recognised that cost bases are now very lean in a response to the first one.
To that end, Citi suggests only under an extremely bearish return-to-GFC scenario would corporate earnings fall back to the 2009 lows. If the next downturn is milder, corporate earnings are expected to continue to grow.
Citi suggests that at current prices much bad news is already priced in.
