There has been anguish for almost every region since the global financial crisis struck in 2008, but political will and effective policy will prevent further torment, writes Shoyeb Ali
Irrelative of bullish or bearish tagging, the year 2011 will be remembered predominantly as a year where market volatility reached its peak. The year was marked by a period of international institutions bailing out countries within the eurozone, in comparison to the preceding years, which were marked by governments structuring bailouts for the ‘too big to fail’ banks. There were several economies, especially in the eurozone, which posed a big but meaningful question: whether they should go bankrupt or be bailed out? Either way, it was clear that taking daredevil risks had not paid off and governments were forced to act quickly, often taking decisions that were knowingly going to be bad for their economies in the short-term. In a sense, the whole story made us realise that extravagancy is going to cost sooner or later.
On the GCC side, six markets also followed a similar downward trend, though they performed much better than in the previous two difficult years
To make the situation worse, until the beginning of 2010, it was commonly believed that emerging economies would supersede developed nations and provide much needed impetus for the global GDP. But these expectations proved futile once cracks appeared in their growth strategies, such as a high reliance on exports, self-inflicting domestic issues of inflation, high interest rates, fuelling asset prices and the general weakening of currencies.
Not that the developed nations fared any better. The US struggled on many fronts such as unemployment, a sovereign downgrading (from S&P), a weakening dollar and bumpy economic growth. Many once prolific eurozone countries found themselves at the summit of financial turbulence, becoming famous once again but for all the wrong reasons.
Europe, conceivably, vacillating on the brink of collapse, did not leave much on the table for investors’ joy. Escalating debt problems, which for many turned into a depression, was not just limited to Europe, it spread like contagion, where most global equity markets could not cross their 2010 closing level and ended the year on the red turf under the dark shadow of negative economic outlook.
Performance of equity markets
Surprisingly, the FTSE 100 minimised its cumulative yearly losses by witnessing a couple of healthy trading sessions at the end of 2011, while the NYSE restricted its downfall on account of encouraging Q3 results, driven by improving personal consumption, non-resident investments, growing exports and government spending.
In the BRIC category the Bovespa index of Brazil was the best performer whereas the Russian market did not fare so well despite an impressive return of 20 percent plus by June 2011, meeting a crucial fate at the end of the year, predominantly due to the eurozone crisis and uprising confusion over Putin’s presidency candidature, which muddles investors’ decisions to invest in the market.
On the GCC side, six markets also followed a similar downward trend, though they performed much better than in the previous two difficult years. Regardless of economic comfort from strong oil prices, a continuity of weakening investment in Europe and the US, specifically relating to strong sectors in the UAE, elicited pains to the GCC region.
Limited operations, vast investments in the US, Europe and UK markets and huge exposure to their depressed local real estate continuously weighed down on the GCC markets. Corporations continue to face immense difficulties to get returns on their investments as buyers refrain from working within these sectors. Moreover, debts are now seen as an integral part of corporate finances, making the lending environment tough and stressful for the management who cannot operate their businesses with free will.
Poor investment conditions
In this region, Qatar was the lone positive performer while the other countries ended the year on a negative note. In contrast to last year’s positive performance, Kuwait’s Weighted Index reported a double digit dip of 16.4 percent, mainly steered by political turmoil at local level as well as geo-political tensions in the region. The performance was sluggish despite the government’s commitment to implement new investor-friendly Capital Market Authority (CMA) rules.
Comprehensively, the year was severely impacted by the chaos in the Middle East, natural disasters in Japan, eurozone debt drama, the downgrading of the US and by the overall decrease of trade across the globe. In 2011, most of the economists predicted that measures taken by the US and Europe, to avoid the debt crisis, would put the jobs and consumption pattern back on path. However, the tide took a different turn and the year yielded negative results in all markets; economic stability was clearly missing. The investors’ community, in general, could not find much return anywhere as equity, gold, commodities, real estate, debt or any other investment commodity could not perform. To add even more pain to the situation investors are losing out on their nominal saving rate by rising inflation.
The outlook for 2012
In lieu of all current developments, ranging from market trading to other interrelated macro and micro aspects, the year 2012 will be a decisive year in terms of achieving growth (or embracing a deeper recession) Indeed, the fate depends upon the policymakers’ attitude and their sincere efforts to move policy in the right direction.
At the beginning of 2012, the world’s major economies are facing four major challenges on the ‘war against recession.’ These include: slow and inconsistent GDP growth; disagreement over policy implementation; diminishing trade; and confusion over inflation rates. It has been quite clear that global growth will be moderate in 2012 with advanced economies projected to grow at an anemic pace amid rising fiscal imbalance, sustained high unemployment and political uncertainty. In reality, an uncertain environment dominated by the sovereign debt crisis is impeding new investments, which in turn is impacting corporate growth and profitability. To add further woe, the borrowing, in general taken for business expansion or to kick off a new one, is also becoming a herculean task.
Furthermore, the depleting corporate performance is restricting the prospects of new job creation, which is directly linked to overall consumer confidence and spending. On the European side, the rising fear of non-performing assets is paving way for a downgrade fear to various renowned and international organisations. And, if the debt disruption is not settled soon with strict financial discipline, the most powerful economies of the eurozone may face a downgrade rating on their sovereign bonds, which may convert into a significant risk to overall global financial stability.
Strategies for growth
On the Asian side, hopes of surviving the financial crisis are more prosperous despite the slowdown in 2010 in lieu of multiple factors weighing down on their trajectory growth path. Commodity-oriented economies, like Russia, accelerated its pace due to strong oil prices, however, the current situation in Russia is no more promising than it was a year ago due to political uncertainty and unwelcome business atmosphere.
In the MENA region nothing concrete can be achieved if governments keep spending on public finance and feeding subsidies instead of diverting funds towards constructive projects
China and India emerged as true jewels by posting solid growth numbers even during the tough times. China carried on hefty government spending and profited from cheap exports to the western world whereas India continued with robust domestic consumption.
However, the growth story of these two countries does not remain certain, given the eurozone crisis and its impact on other economies. In addition, China is witnessing a slowdown in investments whereas India is fighting high domestic inflation and rising interest rates which are ultimately negating the corporate profitability and its currency strength.
On the GCC side, high oil prices have continued to provide financial muscle to oil exporters who have experienced the unwanted side effect of it impacting upon their trade accounts. Furthermore, political unrest in many countries has worsened their economic parameters as witnessed in Egypt, Tunisia and Syria. Exporters have deep pockets; yet their respective markets were seen trapped in a nervous disposition that could not release these nations from diminishing returns.
In the MENA region nothing concrete can be achieved if governments keep spending on public finance and feeding subsidies instead of diverting funds towards constructive projects. Also, high oil prices do not guarantee that everything is ‘in-order’ at home, given the external links of all oil economies, especially to Europe and East Asia.
In a nutshell, the outlook varies from zone to zone, though in general the current developments hints at a recession over growth. The trouble in the eurozone cannot be denied and geo-political imbalances will continue to hamper market and investment sentiments due to the globalisation of economies. Emerging economies are trying their best to boost global growth, however they have their own limitations too. Despite this, if correct economic growth policies are drafted and implemented with a touch of sincerity, it won’t be a surprise to see black numbers back on the global economic boards.
Shoyeb Ali is Vice President – Investment Research at Muthanna Investment Company