Looking to the year ahead, the million dollar question is whether the development of the emerging markets will continue to keep global growth ticking over, or will the sub-prime fallout and forecasts of slower US growth continue into recession and drag down the rest of the world’s economies?
There is no clear cut answer but lets examine the facts:
- Western economies look like they will experience a slowdown in 2008, although the scale of which is open to debate. As a result, companies heavily reliant upon consumer spending are the most likely to suffer.
- Australia has just elected a new government, but we do not see this having major implications for the economy or markets in 2008. The bigger issue for us is how much tightening the Reserve Bank will have to do to get on top of the inflation outlook.
- The recent worldwide share market falls resulting from increases in defaults on US sub-prime mortgage lending may have not yet run its full course, there may yet be more bad news.
- A slowdown in the US economy is likely to lead to a reduction in interest rates and as a result investors are likely to look overseas for higher returns, countries like China, India and Russia/the former Eastern bloc with higher growth and interest rates.
Some analysts are dismissing China as they feel it’s too heavily reliant upon the US economy. However, China is a lot more robust than it was a few years ago and the country is industrialising at a phenomenal pace. Throw in the Beijing Olympics and 2008 looks like it could still be an investment opportunity.
One important thing to note with these new emerging markets; their economies are much more volatile than Australian equities and definitely not for the faint hearted. Whilst I personally don’t feel that these economies are vastly over-inflated, in the short term the bull run could well be in its last Phase. This phase can be the most rewarding and exciting, but is also at its most volatile.
Funds Reviewed in this issue: