On 23 April, economist Nouriel Roubini’s RGE Monitor updated its 2009 global economic outlook. It kept the forecast for China’s growth for the year at 5.5%. On 24 April, Morgan Stanley upgraded its Chinese gross domestic product (GDP) growth forecast to 7% from 5.5% citing the aggressive policy response to the slowdown seen in the last quarter of 2008 as the reason for its expectation that recovery would be sooner and stronger.
The Morgan Stanley economists hedge their bets in more ways than one. Despite affirming that a goldilocks recovery scenario is unfolding, they stress that it is a public sector-led recovery and, hence, it might be jobs-rich but profits-deficient. Assuming no recovery in the US, Europe and Japan in 2010 (it is not the base case scenario of Morgan Stanley) and no additional policy stimulus of considerable size, they aver that the growth rate of 2009 cannot be sustained in 2010.
In the case of India, private sector growth estimates for the year 2009-10 are in the broad range of 3-6%. In the latest policy statement for the new fiscal year that began in April, the Reserve Bank of India has pegged its estimate at 6%, whereas it estimates growth for 2008-09 at slightly below 7%. Roubini’s RGE Monitor pegs India’s growth estimate at 4.3% (not sure if it pertains to calendar year 2009 or fiscal year 2009-10).
The statistics released by the central bank show why the growth estimates for the fiscal year that just ended and the one that has just started are still on the high side. The trends have been known for some time, but the numbers still make an impact. The collapse in overseas trade credit, bank credit and foreign institutional investor outflows have placed the overall balance of payments in slight deficit at $20 billion for the April-December period, compared with a surplus of $67 billion for the corresponding period earlier.
The silver lining has been the foreign direct investment inflows—at $27.4 billion in the first nine months of 2008-09, compared with $20 billion for the same period in 2007-08. If the election outcome turns out to be as indecisive as is being currently projected and if the recent trends in corporate profits are any indication, then it is hard to justify stock indices trading at a six-month high.
Although this column recently argued that decoupling of developing economies was under way, one needs to underscore that it is a long-term process. Clearly, the stock market rally of the last six weeks has witnessed only strange bedfellows. Emerging stock markets have advanced at the same time as stocks such as AIG. The latter has gone up fourfold, from around 0.40 cents to cross $1.60 since 9 March.
It is hard to accept that a new bull market will be led by a sector that is expected to lose just under a couple of trillion of dollars this year and the next, and whose profits have been bizarrely boosted by a decline in the market value of its liabilities. According to the latest Global Financial Stability Report (GFSR) of the International Monetary Fund (IMF), estimated losses on loans and securities held by US banks for the period 2007-10 is $1.6 trillion. The total for the entire financial sector is $2.7 trillion, an estimate that has virtually doubled from the October GFSR figure of $1.4 trillion.
On top of that, only now have governments begun to prepare their citizens for the tax burden they are going to impose on them for having saved them from the financial crisis. The marginal top tax rate in the UK goes up to 50% (for incomes exceeding £150,000 from 2010-11) and the government net borrowing (fiscal deficit) stays well above 10% of GDP in 2009-10 and in 2010-11. It should be stressed that the British government assumes a real GDP growth of 1.5% in 2010, whereas IMF projects a contraction of 0.4% next year, not to mention the near 1% overestimation of likely growth this year by the government, compared with the IMF forecast.
In the US, estimates for operating earnings and “As Reported” earnings for this year and next suggest that the S&P 500 stock index is either fully valued or slightly overvalued. Analysts’ estimates of operating earnings for 2010 put them within touching distance of the peak operating earnings of the S&P 500 companies in the cowboy years of 2006 and 2007. It is up to readers to judge how far realistic and grounded have analysts become since the crisis broke out.
Summing it all up, even for the believers in decoupling, it is time to batten down the hatches. We have not even touched the political and health risks that are rising slowly like the mushroom clouds of a nuclear explosion. Mattresses won’t do.
V. Anantha Nageswaran is chief investment officer for an international wealth manager. These are his personal views. Your comments are welcome at firstname.lastname@example.org