Risk difficult to balance this summer, says Lombard Odier IM’s Nakamura
Jean-Louis Nakamura, CIO Asset Allocation group at Lombard Odier Investment Managers, says that trying to balance risk this summer looks incredibly complex.
The economic cycle and economic policy decisions – or non-decisions – have see-sawed back and forth for nearly three years.
This is now beginning to ease off with the passage of time. Since the recession of winter 2008-2009 and the vast monetary and budget stimulus plans initiated to counter its effects, global activity has entered a phase of fragile recovery. The rally has taken place in successive waves, regularly threatening to falter due to excessively vulnerable global demand and tottering under the weight of the proposed deleveraging. Each time, an additional stimulus was needed to avoid a relapse. This was provided in good time in the United States, Japan, and the United Kingdom, but the effectiveness of these measures was increasingly called into question. In Europe the failure of the policy mix to tackle the challenges of the financial crisis and the economic slowdown sparked the most criticism and the continent still justifiably monopolizes attention today.
Two years ago, when the sovereign debt crisis erupted, we wrote that Europe was first and foremost a victim of a deep-seated governance crisis, even more so than of the financial crisis.
Since then, nothing has altered our view. We will return to this issue subsequently to analyze the conclusions of the European Council meeting of June 28-29 and their potential short- and mid-term repercussions. for the moment one thing is clear: politics, or rather a lack of policies, have contaminated the real macro-economy.
Global activity wasn’t faring too badly three months ago, even if global growth was clearly below its potential. In the United States, both regional and national business surveys pointed to fairly robust manufacturing growth, despite a slowdown since the start of the year. Employment figures remained consistent with a gradual improvement in the labor market, and the real estate market seemed to be picking up from a healthier basis.
In China, the slowdown was noticeable but seemed “under control”, especially in view of the authorities’ room for maneuver. Meanwhile, the Japanese economy seemed to be catching up on the production lag that had built up during the past year in the wake of the tsunami and the Fukushima catastrophe.
Europe’s peripheral economies plunged into a deep depression, but seemed to be able to rely once again on the German economic engine to steer clear of recession. Then the markets focused on something else: the re-emergence of European difficulties triggered both by the worsening banking crisis in Spain and renewed problems following the first legislative elections in Greece.
These issues highlighted the ineffectiveness and inadequacy of the European action plan applied so far, and cast doubt on Europe’s ability to escape the Chinese torture it was suffering without hurting itself in the process: the torture took the form of public finance debt, intertwined with a very vulnerable banking system, and growth at a standstill.