“It’s All Over Now” (Or is it?)
Justin Urquhart Stewart
For ageing rockers around the world this is one of the great anthems of Mr Michael Jagger; however for City optimists this has also been the headline that they have all been waiting for. Is it really true that for key economies of the globe “it’s all over now”- the recession that is?
Over the past few weeks France, Germany and Japan have all declared that they have officially come out of recession. Additionally China has said that its growth is still there and India has chimed in as well – so something must be improving. Maybe then we can at last say that if it isn’t all completely over, then it is at least getting better.
Strangely though, I find it interesting that you can spend effectively three calendar quarters with your economy shrinking and be in a recession, but just one quarter of recovery and apparently it’s all over. However, here is going to be a key area of confusion. There is a big difference between coming out of a recession and then being able to go on and build a significant and sustainable recovery.
Here is a classic example of the difference of attitude between Europe and the US. Typically the Europeans will be taking a more cynical, or some more charitably would say pragmatic, view. This will be reflected in comments about concern over where the growth comes from and its sustainability. The Americans on the other hand will be taking a far more constructive view, in that the worst is past and that things, despite a few hiccoughs, will get better. The truth of course is somewhere between the two in Mid-Atlantic.
This is where we need to take a step back to look at the bigger picture. We all know the global economy has had a financial heart attack, where the blood flow of credit very nearly stopped altogether as the credit structures went into seizure. Now we are slowly seeing this seizure and spasm beginning to ease, as credit markets start to dribble through, if not functionally flow.
It is going to take time and there is little likelihood of banking strength and liquidity returning to pre crisis levels any time soon – it is going to be a very gradual process. In fact for many commercial banks this is the most precarious period. Post recession is when companies need the support of cash flow facilities from banks and it is during this tender and sensitive period that many companies finally succumb to failure. This is not just painful for those companies but it will directly affect the banks’ write down of defaults and bad debts. Recent experience has shown us that a lot of weak lending has yet to be written off and has already been effectively blocking part of the vital credit flow.
The next issue will be the removal of the stimulus packages from the global economies. This has in effect put the global markets on steroids as they have taken wide eyed comfort (probably with dilated pupils) from this support. The key question will be then what happens once the narcotics are withdrawn? Will the patients slump back or has this frenetic boost been enough to get them going again? We will have to wait and see.
China pumped in the equivalent of 15% of its GDP, the US “cash for clunkers” scheme had to be extended because of demand, and elsewhere the stimulus packages would seem to have been effective. It is already quite possible that the UK economy may already be out of recession but really this is a technicality. The next stage will be moving into recovery. This then is probably going to be quite a long drawn out affair with periods of low growth and even sinking into reduction again for short periods.
However the good news is that global growth will generally recover and this will affect Europe directly as one of the international and open economies in the world. Stock markets will have a better chance of looking for earnings and growth and provide a greater footing for all our investments, but inevitably over-enthusiasm is likely to get ahead of practical evaluation – such position as I suspect we are in at the moment.
As investors we need to look further to those areas where there will be a greater chance of more solid economic expansion and ensure that we can participate in it with a broadly based asset spread.
So as the darkest clouds part and the shafts of light come through we can see that the global financial tempest has wrought its damage but now the repair work begins, and with it will come greater confidence and eventually more sustainable growth.
Evaluating and selecting the right investments is probably beyond the capabilities of the ordinary investor in this environment and can only be achieved through professional advice. Speak to one of the financial advisors at Guardian Wealth Management who will be pleased to illustrate how potential opportunities can be captured using a combination of product and fund structures.