Global economy 'on brink of an upswing'
Dubai, July 17, 2009
The global economy is set to recover in the second half of 2009 as the financial markets gets stabilised and investors’ risk aversion significantly reduced, according to Bank Sarasin, a leading Swiss private bank.
Bank Sarasin in its latest “Global View” report for Q3 2009, said the world is on the brink of a cyclical upswing which should boost the global economy through to 2010. Emerging economies could drive growth, it added.
However, the bank cautioned that the 'return to positive growth from the second half of 2009 onwards should not be misinterpreted as a sign that the worst economic crisis in 80 years is finally over. For the inventory cycle to revive, end-consumer demand must stabilise first,' the report stated.
The reversal of sentiment indicators should start to be felt in the real economy. As the recovery kicks in, the investors must take a cyclical stance in their portfolios, it said.
After the corporate bond rally in the first half of the year, attention will switch to equities in the second half. In its regional selection, Bank Sarasin said it was focusing on emerging markets. The rotation away from defensive to cyclical sectors is likely to continue.
One of the recurring themes of every economic cycle is that collective corporate production tends to be cut back excessively during difficult economic conditions, resulting in the sort of bottlenecks we are now experiencing. There are already isolated reports that inventories in several industries are running low.
If this trend continues, we can expect a cyclical upswing in the second half of 2009 – as long as states continue to compensate consumers’ reluctance to spend – as well as the return of positive growth rates in most regions of the world, it added.
The report said the cyclical upturn was likely to put government bonds under pressure in the second half of the year and lead to higher interest rates.
'But the prospect of a low inflation period in 2010 and the continuation of a zero-interest-rate policy by most central banks will keep a cap on interest rates. Following the strong rally in corporate bonds in the first half of the year, the potential evident back in January is almost exhausted.'
Bank Sarasin is therefore focusing increasingly on equities, which are likely to benefit most from the upturn.
Convertible bonds are also attractive, partly because they stand to benefit from the continuing narrowing of risk premiums, and also since they would profit from the expected stock market rally.
Inflation-protected bonds should produce slightly lower returns than normal bonds, but at the same time offer investors the opportunity to protect themselves from a spike in inflation, the report added.
Jan Amrit Poser, head of Research and chief economist at Bank Sarasin, said, “We are fairly confident on balance that we are on the brink of a cyclical upswing which should boost the global economy through to 2010.'
'Whether this will develop into a self-sustaining recovery will only become clear in 2010. The return to positive growth from the second half of 2009 onwards should not, however, be misinterpreted as a sign that the worst economic crisis in 80 years is finally over.'
'For the inventory cycle to revive, end-consumer demand must stabilise first,” he pointed out.
Philipp E. Baertschi, chief strategist at Bank Sarasin said, 'We are now overweight in equities, despite the risk of a setback in the short term. We have already significantly reduced the bond holdings in our portfolios.'
'In the third quarter we will use the cash proceeds to further increase our weighting of equities and commodity investments, depending on the market environment,' he remarked.
Bank Sarasin highlights three structural limiting factors that could dampen the mid-term economic recovery: The biggest brake is t