Equity markets should further outperform, says Julius Baer’s Gattiker

The year ahead has all the ingredients to go down in financial history as the ‘year of recoupling’, says Julius Baer’s head of Research Christian Gattiker.

After years of exceptional stress and distortions in the world economy and financial markets, a lot has changed. This calls for a reassessment of growth prospects – in both the Old World and emerging markets – as well as asset prices and investment decisions.

Growth stampede and savings glut
In the first few years of this millennium, we experienced a world of exceptional growth and crises. China opening up to the world economy by joining the World Trade Organisation in 2001 reminded us of Napoleon Bonaparte’s quote “when China wakes, she will shake the world.”

First of all, it created massive growth in China – and all its (commodity) suppliers – as well as a global ‘savings glut’ since many emerging markets were only growing by capital expenditure, not consumption.

The largest share of export revenues was ‘recycled’ in Western capital markets. This in turns spurred large increases of leverage in some
of the mature economies. The US housing market is the poster child of
these excesses. The bursting of bubbles (US credit crises first, euro crisis later) was as unpleasant as the years before were enjoyable.

Long cycles coming to an end
Just when economists and investors have become used to this type of imbalances and changes in growth patterns, the harbingers of a new era are
on their way. In fact, the decoupling (a term coined a few years ago) seems
to be increasingly turning into a recoupling.

Looking at economic growth, differences between the largest emerging
economies (the BRIC – Brazil, Russia, India and China) and the mature economies (USA, eurozone and Japan) are shrinking drastically. Just when economists and investors have become used to changes in growth patterns, the harbingers of a new era are on their way

What has changed?
First of all, in the crisis-stricken Western economies, a lot of healing has
taken place. The USA ‘rebooted’ its financial system in 2008/2009 and
worked off the inflated financial debts of US consumers.

Europe has enlarged its institutional options by introducing the fiscal compact, a banking union and a large firewall of around €52trn, backed
by a more proactive central bank.

Secondly, the business model of many emerging markets is running into trouble: many policymakers there reacted by providing stimulus for their domestic economies, preferably by issuing more and more credit. This in turn resulted in unsustainable current account deficits (basically importing far more than they could afford).

Click here to read full report Julius Baer Insights 2014

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