“Markets reacted negatively to a wide range of disappointing macroeconomic data in May, and we believe that there will be more negative data to come,” says Jason Pidcock, manager of the Newton Asian Income Fund from Newton, part of BNY Mellon Asset Management.

“For this reason, we are likely to maintain our relatively cautious outlook for the rest of the year, despite the increasing number of high-quality companies available at attractive valuations.

“We are particularly aware of the problems in China, where the efforts of 2009 and 2010 to stimulate growth are beginning to have an adverse impact upon the economy; our Chinese exposure is very selective,” he adds.

“There’s no doubt that a significant economic slowdown in China would affect the whole region but we do not expect growth to collapse.”

Pidcock continues, “Growth remains strong and we expect this to continue. Furthermore, we believe that the concerns over China’s economic growth are broadly priced into markets and we would describe our view of the country as cautious rather bearish.

“We think that its economy is likely to plateau from here, with GDP numbers unlikely to fall below 7%. The economy is in the process of rebalancing and this might not happen quickly or smoothly. As such, further interest rate cuts and fiscal stimulus are likely, although these measures are unlikely to be as aggressive as they were in 2008.”

Look South East…
“We are more optimistic about much of South East Asia and countries such as The Philippines, Thailand, Singapore and Malaysia. Indeed, this view was reinforced on a recent Newton visit to the region; growth in these areas seems to be holding up well, with Thailand and The Philippines, in particular, benefiting from falling commodity prices.

“Though dependent upon these lower costs, we would expect these countries to be relatively immune to a Chinese slowdown, in part, because they have not undergone a credit boom so there is no reliance upon rising property prices to fuel growth but also because they still boast robust domestic consumption,” Pidcock adds.

3 July 2012

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“The key to the global economic outlook is whether the resolution of the European financial stresses evolves in an orderly, semi-orderly or disorderly way,” Hoey states.  “We expect a semi-orderly pattern, which should be consistent with a global slowdown at a subdued pace rather than a full-scale global recession.”

Hoey regards the global economy as fundamentally recuperative after the Great Recession, but vulnerable to shocks since private sector deleveraging and fiscal consolidation in developed countries is not yet complete.

“Our interpretation is that the U.S. is ‘short-funding’ a persistent U.S. budget deficit rather than financing it by the sale of long-term bonds to the private sector,” Hoey says.  “We view the sale of new bonds by the Treasury followed by Federal Reserve purchases of Treasury bonds in the secondary market as the Federal government selling bonds to itself.  After all, the profits of the Fed flow to the Treasury.  At some point in the future, persistent deficits will need to be funded by increased sale (net of Fed purchases) of long-term Treasury bonds to the private sector.” 

“The Federal Reserve has now taken responsibility for the yield on long-term Treasury bonds, some 60 years after it won its independence from the need to support the long-term Treasury market,” Hoey concludes.

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“The worst case would be a mild brief recession, but we are more likely to experience a low-growth recession over the next three to six months,” he said.  “While the worst of the current downdraft likely is behind us, it is difficult to determine the exact market bottom for these types of corrections.”

Malvey characterized the current environment as an aftershock to the Great Recession, and noted that anxiety about a second economic dip after a primary recession has long been common. Typically, such concerns and negative market reaction about a possible secondary recession tend to dissipate within three months as a result of negative news exhaustion, markets finding an equilibrium state, and the emergence of attractive equities and credit debt after their decline to discounted valuations, he said.  Malvey also noted that risky assets tend to rally before the end of recessions.

The current market volatility has been sparked by a combination of catalysts, including anxiety about a potential U.S. default arising from the spirited Washington debate over raising the U.S. debt ceiling, the ensuing downgrade of the U.S. by S&P from AAA to AA+, the threat of European contagion, and growing evidence of global economic growth deceleration.   Taking a long view, these developments mark the first step in a major political and economic course adjustment for the United States and Europe, according to Malvey. The anemic post-recession recovery and the pronounced market volatility indicate that both the U.S. and portion of Europe are on an unsustainable path due to reduction in potential economic growth, aging demographics, and rising entitlements, he said.

“This will be a long journey,” he said. “Additional difficult decisions will be required in coming years along the road to fiscal rectitude.  Adding to the difficulties in the U.S. is the concern about whether the new congressional super committee can agree to further deficit cuts in December 2011 without the enactment of draconian automatic triggers.”  Malvey also said that many market observers are questioning the advisability of federal government spending cuts in a high-unemployment, near recession environment.

Regarding the sovereign issues in Europe, Malvey said, “It remains to be seen if the European Union, International Monetary Fund and the European Central Bank can shore up the capital markets and prevent the issues in the weaker European economies from spreading.”

Concluding in looking at the current low-interest environment, Malvey noted that dividend-paying equities could become increasingly attractive.  He added that the unresolved European debt issues could drive the dollar higher against the euro in the short run, although he expects the dollar to continue to decline against most other currencies over the medium term.

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