With the effects of the sub-prime crisis weighing heavily on global economic growth, the financial community is bracing itself for an uncertain 2008.
The possibility of a global slowdown is looming, which could see share valuations fall sharply. Investors must address the question of whether the credit crunch will continue to undermine confidence and if the bull-run in commodities and China will come to an end?
Analysts predict on the whole, despite softening economic growth, global equity markets are expected to rise modestly, beating bonds and cash, but not by a significant margin. And that owing to impressive economic growth rates, global emerging markets will be key to capturing outperformance. But investors have also been warned the main downside risk to emerging markets is that turbulence in global financial markets could disrupt capital flows to emerging markets, and thus trigger problems for its expansion.
The global economy has faced a significant test this year, but nonetheless, experts have raised the question of whether generally sound fundamentals will sustain growth.
The collection of analysts below attempt to predict directions for global economies on a macro level, examine what investors may find in store for their stocks and commodities, and how currency movements can affect the investment outlook for 2008.
Global Insight: US ECONOMY HITS DANGER ZONE
Nariman Behravesh, Chief Economist
While the dollar has been on a downward trend since 2002, the recent weakness is a function of fears over the sub-prime crisis and a United States recession, combined with expectations that the Fed will cut interest rates more than other central banks.
As the economy begins to recover in the second half of 2008 and early 2009, sentiments on the dollar will turn more positive, at least against some currencies. We expect that the euro will top out at $1.55 next summer and fall to $1.49 by year-end. Both the Japanese yen and the Chinese renminbi should keep appreciating given the large current-account surpluses in both economies.
Schroders: COMMODITIES TO BENEFIT FROM MARKET TURMOIL Christopher Wyke, Commodity Product Manager
Many commodities have performed well during 2007 and this trend will remain over 2008. Strong demand for natural resources, particularly from world’s developing economies, should remain a key support of rising energy, metals and agriculture prices. Additionally, on the supply side, many inventories are at, or close to, record lows.
Given that many analysts are predicting that the period of heightened volatility is likely to extend over much of 2008, this furthers our positive outlook on commodities.
AXA: A STOCKPICKER’S VIEW OF THE GLOBAL ECONOMY
Nigel Thomas, manager of the AXA Framlington United Kingdom Select Opportunities Fund
Global growth is key to equity markets as US and UK growth will slow down. Can the coastal Chinese manufacturers, supplying Wal-Mart, avoid this slowdown? The credit crunch may have started with US sub-prime issues but has spread.
The full implications have not been fully felt yet, but liquidation of debt must have an effect on growth.
And so we take comfort in the stock market adage that in the short term the stock market is a voting machine – over the long term, it is a weighing machine.