© 2011 Knowledge Bureau, Inc.
After the Great Recession:> What kind of recovery?> What to do about it?Bill Cheney,Chief Economist,Manulife Asset Management© 2011 All Rights ReservedThe Knowledge Bureau© 2011 Knowledge Bureau, Inc.
A Dangerous WorldEverywhere we look, risks loom:• In the US, dysfunctional politics leave theeconomy stuck in sluggish growth, vulnerableto any new shock• In Europe, sovereign debt markets keepthreatening to descend into panic• Upheavals in the Middle East drive oil prices• In China, now the world's 2 nd -largest economy,will booms give way to busts?© 2011 Knowledge Bureau, Inc.
Politics, Politics, Politics...A common theme is that the key risks aremostly political:• gridlock in the US• allocation of Eurozone bailout costs• election-driven dash for austerity in the UK• regime changes in the Middle East• policy mistakes in China© 2011 Knowledge Bureau, Inc.
...so what about the economics?• The US is still the biggest driver of theworld economy• The biggest driver of the US economy isstill consumer spending, so:– how are US consumers faring?– how are they likely to behave?© 2011 Knowledge Bureau, Inc.
US jobs & incomes weak but risingJob gains areinadequate, but atleast they are positiveWith longer hours andsome small wagegains, workers’ incomeis slowly recovering© 2011 Knowledge Bureau, Inc.
Will US consumers keep spending?Americans are stillshopping, but this isn’tadjusted for inflation orpopulation, so it’s prettyweakConsumers are saving more thanthey did before the recession, butit looks as if the upward trend mayhave stopped – right now thatwould be good news!© 2011 Knowledge Bureau, Inc.
Another view: not just a recessionA debt bubble means adifferent kind of recession –followed by years of painfuldebt reduction, which we’veonly just startedOn the other hand, the burden ofdebt service has been slashed bylow interest rates, allowingconsumers to contemplate newmortgages and car loans© 2011 Knowledge Bureau, Inc.
US Outlook: muddling through, probably• I doubt that consumers are so traumatized that they willkeep retrenching more and more• We’re still vulnerable:‣ if higher food and oil prices reduce purchasing power, or...‣ if market losses reduce people’s willingness to spend• Best bet is that growth builds on itself as confidenceand employment recover• Pent-up demand could surprise us all... but I do worry that the economy is on its own: monetarypolicy is unable and fiscal policy is unwilling to helpboost growth© 2011 Knowledge Bureau, Inc.
Europe in Crisis: should we care?• Europe generates waves of fear in the markets,while its economy maintains slow but positivegrowth• Waves in markets wash around the world, butthe impact on the North American economy islimited• Troubles in Europe make us look better bycomparison!© 2011 Knowledge Bureau, Inc.
What if the Euro breaks?• If the politicians can’t compromise:‣Greece leaves the euro – not such a big deal‣Germany leaves – a very big deal• Either way, it wouldn’t be a disaster for us:‣Germany would have a relatively strongercurrency, so a bit less competitive‣Other currencies (ours) would look betterBottom line: this still seems a low risk, butwe do have to worry about contagion© 2011 Knowledge Bureau, Inc.
China: no hard landing imminent• Concerns include a housing bubble, an equitycrash, bank insolvencies, loss of export marketshare, environmental degradation, and militaryconfrontation• These are serious issues, but all should bemanageable for the moment given thegovernment’s power, financial resources andgenerally cautious policiesNot high on my list to lose sleep over© 2011 Knowledge Bureau, Inc.
Canada: riding the global waveCommodity currency: a blessing and a curse– Global growth drives commodity prices up (thiscentury is different), making Canada richer– Commodities and fiscal strength drive up the CAD,hurting all other sectors’ ability to compete (the Dutchand/or Swiss disease)‣ But these are problems every other countrywould love to face – enjoy it!‣ The big risk would be a recession in Asia• not impossible, but not likely© 2011 Knowledge Bureau, Inc.
So what’s an investor to do?• The “most likely” scenario is more of the same:sluggish growth in developed countries, rapidgrowth in emerging economies• With this outlook, it pays to be in equities, with ahealthy allocation to emerging markets and tomultinationals who sell to emerging economies• Asian currencies, led by China, keep risingrelative to the USD (less clear vs. CAD)© 2011 Knowledge Bureau, Inc.
“Most likely” isn’t everything• The risk that something goes wrong somewhereis large, but it should be manageable withnormal diversification• The risk of another severe global recession ismuch lower, but it’s qualitatively different:– everything becomes correlated, with no obvious safeharbor in the storm (gold? Swiss Francs?)• Companies can keep making money with slowgrowth, but a global recession would hammerprofits© 2011 Knowledge Bureau, Inc.
...and now for a completely different thoughtUpside risks to the economic outlook –sometimes things actually go unexpectedly right:• political compromise in the US• resolution of Euro sovereign risks• peace and democracy in the Middle East• global rebound in confidence and spendingThe chances of all these happening at once areslim, but the odds of one or even two may not beas remote as the media would have us believe!© 2011 Knowledge Bureau, Inc.
Conclusions• Markets are probably overly worried about theeconomy – using unreliable, short-termindicators to predict broad trends• The risks are real, and it’s not clear thatgovernments are ready and able to cope withanother round of problems• Investors need to diversify on every dimension:asset classes, industries, countries,commodities, currencies, maturities© 2011 Knowledge Bureau, Inc.
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