Published: March 01, 2012
The global recovery has faced many challenges over the past year, and heading into 2012 the dominant issues are yet to be resolved. Global growth remains sluggish and the situation in the Eurozone has become more pressing. At the same time, however, support for the recovery has never been stronger. Kathleen Hughes and Jason Granet of the Goldman Sachs Asset Management (GSAM) Global Liquidity Management team, discuss these developments and the potential implications for investment in the year ahead.
Our outlook is for slower global growth in 2012, with a wide disparity between developed and emerging economies.
If we focus on the world’s largest economy, the outlook is generally benign. US growth picked up notably in the fourth quarter, to 2.8%, and we expect a pace close to trend in 2012. Manufacturing data point to continued expansion, unemployment has declined, slowly, from a peak of 10% in October 2009 to 8.5% as of end-2011. We’ve also seen stabilisation in the housing market, and we expect a slow and gradual recovery.
In terms of global growth, the bulk is still generated by the developing world. For example, though China’s growth has slowed, it was still running above consensus at 8.9% in the fourth quarter, and we believe that policymakers will provide sufficient stimulus to keep the pace around 7.5% for 2012.
As was the case last year, the Eurozone’s sovereign debt crisis is the dominant risk to the global economy and markets. While we don’t expect the global recovery to be derailed by events in Europe, we believe the risks have intensified as the crisis has evolved. Where before the focus was on the peripheries, today the largest economies are also showing signs of strain. We now see a higher risk of recession for the Eurozone, with possible implications for its neighbours, though we believe the UK will probably scrape through with positive growth this year.
In contrast with the situation a year ago, we think monetary policy globally is biased towards easing for the foreseeable future.
This isn’t your traditional policy easing, though, where policymakers deliver stimulus by cutting interest rates. Three key factors have helped reshape the policy environment: 1) the recovery in the developed world is still shaky; 2) governments are under pressure to correct large deficits and reduce debt, and so are less able to boost growth via spending; and 3) interest rates in the largest economies are already close to zero. As a result, central banks in the US, Eurozone, UK and Japan are resorting to increasingly innovative ways to support their economies, from quantitative easing (asset purchase programmes) to extraordinary liquidity measures such as the European Central Bank’s three-year loans. We anticipate more of this style of easing in 2012.
In the developing world, central banks have more leeway to use traditional policy tools, as interest rates are high enough to cut substantially, and slowing growth has helped bring inflation pressures down. Brazil and China have led the shift from a tightening bias at the start of 2011: Brazil made the first of a series of cuts in August, when its policy rate was 12.5%, and the People’s Bank of China started lowering its reserve requirement ratio late last year to allow commercial banks to lend more money. We expect to see more stimulus in the year ahead.[[[PAGE]]]
Generally speaking, sovereign downgrades shouldn’t have much impact on our strategies. Though the triple-A class has narrowed in this tougher economic environment, our criteria for high-quality investments cover ratings from triple-A to double-A. Moreover, we believe that markets are prepared for more cuts, and so the reactions should be muted. However, we remain alert to the risk of more severe ratings actions, and the potential for subsequent cuts to banks’ ratings. This risk is another factor in the rationale for our conservative positioning.
For short duration strategies, we have become more comfortable with the possibility of extending duration – that is, moving further out the curve – based on the signals from central banks in the largest developed markets that they are likely to keep highly accommodative policies in place for longer. We are also extending our reach across a broader spectrum of quality spread products, including corporate credit, covered bonds and agency securities.
For money market funds in particular, the Eurozone crisis has been a game-changer. Doubts about the solvency of troubled peripheral countries, and the expectation of contagion to larger European bond markets, have made some government sectors too risky for investors focused on liquidity and capital preservation. In short, the investable universe has become more limited: government funds have struggled to find viable investments with a positive yield, and we don’t see that situation changing any time soon.
Growth across Asia has remained generally robust, despite the decline reflected in manufacturing purchasing managers’ indexes. The slowdown in China is a key source of concern, especially for the smaller economies most dependent on Chinese demand for commodities. While the risks have increased in light of the European crisis, we believe China’s policy easing should avert a hard landing, and this scenario would continue to support economies across the region.
Japan shares the policy-related challenges of the other large developed markets. Its industrial recovery from the earthquake in March last year and its aftermath was remarkable, and continued policy stimulus is likely, keeping yields at their lows, along with further intervention to curb yen appreciation.
In terms of local investment, we believe the Asia-Pacific region offers ample opportunities in countries that are growing close to or above trend, while mindful of the macro risks. In Australia, rates have rallied in anticipation of policy easing, but yields at the short end of the curve remain above 3%. Similarly, growth markets with strong fundamentals such as Korea are discounting interest rate cuts, and still offer short-dated securities with attractive yields.
Views and opinions expressed are for informational purposes only and do not constitute a recommendation by GSAM to buy, sell, or hold any security. Views and opinions are current as of the date of this article and may be subject to change, they should not be construed as investment advice. This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. The economic and market forecasts presented herein have been generated by GSAM for informational purposes as of the date of this article. There can be no assurance that the forecasts will be achieved. This material has been approved in the United Kingdom solely for the purposes of section 21 of the Financial Services and Markets Act 2000 by Goldman Sachs Asset Management International, which is authorised and regulated by the Financial Services Authority (FSA).
No part of this material may, without GSAM’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorised agent of the recipient.
© 2012 Goldman Sachs. All rights reserved. 67123.STR.MED.OTU
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