Falcon Perspectives - May 2010
Investment Compass gives an insight into the investment decisions of our specialists.
Investment compass - may 2010
Debt crisis – opportunities and risks
The uncertainty spawned by the debt crisis in the eurozone has kept the international financial markets on edge for several weeks. The € 750 bn. Europe-wide bailout and the purchase of government bonds by the European Central Bank (ECB), have failed to calm the markets.
Debt crises are nothing new for the global economy. Every crisis involved restructuring national debt, there were always repayment extensions and interest rate or debt reductions. In every crisis there were massive currency depreciations, which restored the international competitiveness of the crisis-hit countries and regions. On the other hand, this could be the first time that debt restructuring actually turns out to be unnecessary. The EU is doing its best to avoid any restructuring measures, hence its huge debt underwriting commitment. One thing is for sure: Greece has a lot of belt-tightening to do over the next few years, whether through public-sector pay cuts, tax increases or raising the retirement age. Other countries, such as Spain and Portugal, have also announced savings programs, although not as brutal as the Greek one will need to be. Even in Germany the words “save” and “tax increases” are no longer taboo.
The economic repercussions of these savings programs are negative in the short term. People have less disposable income to spend and their purchasing power is declining. There is a risk that the deflationary impact of the savings measures will lead to a slower than originally expected economic recovery in Europe. On a more positive note, inflation and interest rates are set to remain low for the foreseeable future. The major depreciation of the euro – since the start of the year it has fallen by 15% (!) against the US dollar – could provide a major boost to a large part of the European economy, particularly exporting companies. European exporters stand to make big gains from a calming of the equity markets. We nevertheless recommend that investors hold their liquid reserves until the volatility dies down.
Sabina Weber Sauser, CEFA
Head Asset Management and Investment Process
May 2010
Investment Overview
In May, the problems around European government debts, which have been smoldering for several months, unloaded in a real equity market storm. The 750 billion euro rescue package, approved and guaranteed by the EU and the International Monetary Fund, has left many questions...
Investment Overview
Emerging Markets - Winners of the international debt crisis?
As The emerging markets are likely to determine international growth rates in coming years. Strong domestic consumption will drive their expansion, whereas growth largely depended on exports in the past. In sharp contrast, the developed world is suffering from enormous debts. The rising debt levels are likely to durably curb their expansion. The dynamic growth of the emerging markets should support equity prices. Even though an economic decoupling seems possible, the developed world, above all the US, is likely to determine
emerging market equity trends.
The emerging markets are currently suffering from international investors’ increasing risk aversion. The restrictive monetary policy in many of these countries is contributing to the negative sentiment. Rising inflation pressure caused India and Brazil to raise leading
interest rates. Medium- to longer-term, this heterogeneous group of countries has the potential to emerge as a winner of the international debt crisis. They have steadily reduced their debt levels in recent years – in sharp contrast to the US, Europe or Japan. The emerging countries own a large part of the international currency reserves and are generally rich in commodities.
Emerging Markets