Mumbai: The global economy is vulnerable to a double dip recession, according to Stephen Roach, chairman of Morgan Stanley Asia. Asian markets are not factoring in the weakness in the economy yet, says Roach in an interview. “Risky assets are expected to be under periodic pressure.” Edited excerpts:
It’s been a tumultuous period for global markets. Where are we standing now?
I remain very cautious on the prognosis for the global economy. Having gone through the worst crisis in over 75 years, I think the markets were complacent and overly optimistic in rallying sharply in the final nine months of 2009 under the presumption that we would have a classic, vigorous, V-shape recovery.
Straight talk: Roach says the idea of decoupling is a joke. Adam Berry / Bloomberg
I think the recovery is going to be weak, anaemic, fragile, and potentially vulnerable to a setback or double dip. I think the reality is starting to hit home in overly exuberant financial markets.
How are you reading the news from Europe? Do you think this could blow up to be a contagion-like situation?
All major crises have one thing in common; they leave countries, individuals or businesses with a lot of debt. So it is not unusual to have or get driven into a shakeout once the worst is over. I think we are going to see that for some time ahead in terms of the riskier sovereign debt markets of Europe; we could see ongoing debt problems for American consumers and we have certainly seen over 20 years of ongoing debt problems for the post-bubble Japanese economy. So this is not a knee-jerk reaction...that you can dismiss and pretend that it was just a bad dream.
All this has resulted in a wave of risk aversion over the last few days, it seems. Do you see that persisting?
I think again risky assets are going to be under periodic pressure, not constant pressure, from time to time over the next several years.
From our own market’s perspective, the one eventuality people are not dealing with right now is that 2010 actually turns out to be a year of negative returns for emerging markets. How likely would that scenario be in your eyes?
Emerging markets in general and developing Asia in particular had a truly spectacular run from March ’09 to the end of last year. The region, however, remains heavily dependent on external demand and the rest of the global economy. If the global economy remains as shaky as I suspect, then I think there could be some weakness to come in Asian economies that is not really factored into equity prices at this point in time. The idea of decoupling for me has always been a joke for a region that is most dependent on the rest of the world to sustain economic activity.