Fears of a Global Recession

Leon Goldfeld, Chief Investment Officer of HSBC Investments (HK) Ltd, is of the view that concerns about a global recession and a sharp pick-up in inflation, which have contributed to a sell-off in global equity markets, are misplaced. As such, he disagrees with the prognosis made by some that world stock markets are entering a bearish phase.

Global Recession Looks Unlikely

Mr Goldfeld is confident that the global economy will not slip into a recession because he says that the US economic cycle has historically been driven by changes in investment spending, which is expected to remain firm.

He said:" Corporate balance sheets have never been stronger, which makes companies less vunerable to higher interest rates compared with previous cycle. Strong profit growth combined with solid business sentiment is helping to fuel an increase in investment spending."

Although the Fed has raised interest rates 17 times since mid-2004, Mr Goldfeld said that US interest rates have not reached danger levels. This is because real interest rates are still below the critical 4 percent mark (real rates above this mark have historically preceded recessions).

Nevertheless, Mr Goldfeld admits that the recent slowdown in US housing activity should dampen consumer spending.

He said:" The strong housing market has added 1 percent per annum to US economic growth over the past three years. Hence weakness in the housing market will temper economic growth in the second half of this year."

However, a slowdown in the US economy in the second half of this year is unlikely to be a drag on global growth.

According to Mr Goldfeld, economic activity in Europe and Japan looks strong, which should help to offset a slow down in US economic activity in the second half. Consequently global economic growth for the full year should still be healthy, which augurs well for global stock markets.

Mr Goldfeld said that HSBC Investments is forecasting 4.4 percent this year from 4.2 percent last year. Although  it is likely to slowdown to 3.8 percent next year, this is still a healthy growth rate.

Underlying HSBC's forecasts for global economic growth are its projections that the US economy, despite a second-half slowdown, will still see a modest pick-up in full-year growth to 3.6 percent this year from 3.5 percent last year. However next year, US economic growth is expected to slow down to 2.9 percent.

HSBC is even more positive about economic growth in Japan and the Euroland. In the case of Japan, it is projecting that growth will pick-up from 3.2 percent this year from 2.6 percent last year, before easing to 2.7 percent next year.

As for the Euroland, HSBC is forecasting a growth rate of 2.2 percent this year compared to 1.4 percent last year, with growth expected to slowdown to 1.7 percent next year.

No Signs That Inflation Is Poised For A Break Out

Aside from concerns about a sharper-than-expected slowdown in global economic growth, investors have also been spooked by fears about a sharp pick up in inflatory pressures in the US.

Once again, Mr Goldfeld thinks that these fears are unfounded. He highlighted that although commodity prices have increased sharply and remains high; inflation has been under control, unlike the 1970s and 1980s, when a surge in oil prices caused the inflation rate to skyrocket.

Mr Goldfeld is of the view that the US economy is unlikely to generate sustained inflation and the U.S. inflation could peak before year-end. HSBC is projecting that the US inflation rate, which stood at 3.4 percent last year, will remain unchanged this year, before easing to 2.4 percent next year.

Underlying his positive prognosis for inflation, Mr Goldfeld said thet US corporations are cutting employee benefits such as pension and medical costs. This helps to reduce overall growth in employment compensation, offsetting the pressure on costs from higher commodity prices.

Not The Start Of A Bear Market

The recent rut in global stock markets has led some to forecast that the sell-off could be the start of  a bear market.

Mr Goldfeld thinks otherwise. He said that bear markets are usually accompanied by an economic recession, which looks unlikely this time around.

He also said that pull-backs like the one seen in past months are normal equity market corrections and they are a typical feature of a bull market cycle.

According to Mr Goldfeld, unlike the tech bubble in 2000, the bull market of the past three years had a much stronger foundation. It was fundamentally driven and backed by solid earnings growth from companies. Consequently, despite the run-up in share prices over the last three years, price/earnings valuations remain health both among developed and emerging markets.                    - By Vasu Menon, Chief Editor • finatiQ.com

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All information, opinions and statements expressed are subject to change without notice and are not intended to provide any recommendation or advice on investing. Readers should seek professional advice before makeing making any decisions.