The AMP’s Chief Economist, Dr Shane Oliver says this year has been a year of recovery, first in share markets and then in global economic activity, while 2010 is likely to see the economic recovery continue and become self sustaining. This will underpin gains in most growth oriented investments.
But he cautions that with uncertainties about the strength of the recovery lingering and key central banks moving towards monetary tightening in the year ahead, share markets will be more volatile and gains more constrained than has been the case since March.
At the start of 2009, fear of a complete financial meltdown was rife.
There was much doubt as to whether the massive and unrelenting stimulus and financial rescue efforts put in place around the world would work and many were talking off a re-run of the Great Depression.
As a result, share markets and other assets continued to plunge into March.
However, the key message from governments and central banks in most countries was that they would do whatever it takes to head off depression and push asset prices back up.
Budget deficits in some countries were pushed up to 10% of GDP and several central banks moved beyond near zero interest rates to embark on ’quantitative easing‘.
And it worked!
Just when it seemed that all hope was lost, the gloom began to lift in March.
Shares bottomed, credit markets unseized, commodity prices started to rebound, bank losses started to recede and ’green shoots‘ of economic recovery started to pop up.
Talk of a dead cat bounce was common but, as the green shoots turned into saplings and the recovery in share markets continued, it became apparent the massive worldwide economic stimulus had traction.
But while growth has rebounded, underlying inflation pressures have continued to slide reflecting the massive amount of global spare capacity.
As always inflation is a lagging indicator.
Similarly unemployment and private sector credit are also lagging indicators.
Unemployment has increased to around 10% in the US and Europe, although there are signs that it is close to topping.
Perhaps the biggest surprise over the last year has been the Australian economy which has managed to avoid recession and a surge in unemployment despite widespread fears to the contrary.
Australia is about the only advanced country to have had positive GDP growth over the last year.
Thanks to solid export demand, a sounder financial system and rapid and massive economic stimulus, Australia has yet again proved itself to be the ‘lucky country’.
Reflecting this, the RBA has been one of the first central banks to start raising interest rates.
Reflecting the growth rebound, listed growth assets have rebounded in value, as shown in the following table.
- The key winners over the last year have been Asian and emerging markets generally (with gains of around 55%), commodity prices (with metal prices up 80% and gold up 30%), Australian shares and corporate debt.
- Global shares have increased in local currency terms but for Australian investors the gains have been wiped out by a sharp rise in the value of the Australian dollar.
- Cash and government bonds have been poor performers with the latter dragged down by a rise in yields from low levels as fears have subsided.
- After holding up reasonably well in 2008, unlisted property returns fell sharply in lagged response to credit problems and the collapse in share markets.
- By contrast, Australian housing saw positive returns in response to the first home owners boost, the earlier collapse in mortgage rates and the boost to confidence.
As shares are the dominant investment in most super funds, this all translated into a recovery for investors.
The key lessons of the last year were that counter cyclical macro economic policy measures do work, that just as the cycle goes down it also goes up and that markets always bottom just at the point of maximum gloom.
Outlook for 2010
In direct contrast to the doom and gloom of a year ago, the outlook for 2010 is reasonably bright.
Sure, the aftershocks from the global financial crisis – such as high unemployment, periodic debt blow-ups (Dubai, Greece, etc) and constrained bank lending – will linger.
But as 2010 progresses, the global recovery is likely to become increasingly self sustaining.
In this regard the key themes of relevance for investors for 2010 are likely to be:
1. Self sustaining economic recovery. Leading economic indicators point to continued growth over the year ahead.
But most importantly, signs that labour markets are starting to turn the corner – notably in the US – suggest the recovery is on its way to becoming self sustaining.
In other words, fiscal and monetary policy has primed the pump and the private sector will now take over.
2010 is likely to see global growth of around 4% (up from -0.8% in 2009, which primarily reflects the late 2008/early 2009 slump).
2. Stronger growth in the emerging world. Thanks to stronger domestic demand and less in the way of structural constraints such as debt and demographics, growth in the emerging world is likely to be 7% compared to around 2.5% in advanced countries in 2010.
China is likely to grow by 10%, India by 8% and Brazil by 6%.
3. Benign inflation. Inflation lags economic activity because it reflects capacity utilisation which is below normal well into an economic recovery.
This time is no different except that excess ca
