Why a more gradual recovery would be better for everyone
On Tuesday, the MSCI All-Country World Index hit its highest level since September 2008. Up as much as 75 percent from their pre-crisis lows, stocks have been buoyed not only by a firming belief that the worst of this crisis is over but also by a rash of economic and corporate earnings data.
However on Thursday, markets took a hit after China announced slightly worse than expected GDP numbers - the Asian superpower grew at 8.9 percent in the third quarter as opposed to the 9.1 percent some analysts were expecting. The news was particularly concerning because the data suggests that much of this growth is still coming from government stimulus measures, rather than the private sector. As RBC Capital markets economist, Brian Jackson, told the Wall Street Journal "China's economy has taken off, but it is flying on one engine."
Then on Friday, hopes of good news in the UK were dashed when the Office for National Statistics said the gross domestic product fell by 0.4 percent in the third quarter. The contraction is the 6th in as many quarters, the longest recession since the UK started keeping records in 1955.
Questions about the extent and rapidity of recent price rallies have been raised by a number of analysts but a bigger question is: what happens now? According to Max King, investment strategist at Investec, it is in investors' interest to see a slower, more prolonged recovery.
"The risk lies in a fast recovery. If it gathers too much pace interest rates could rise sooner than expected, corporate cost pressures would rise and investors would discount the subsequent cyclical downturn through low equity ratings."
He argues that low interest rates will not immediately translate into a flood of money back into risk assets. "Inflation is low at the moment and so fixed deposit rates offer a pretty reasonable real return," he says. "Equities should be bought for their value and their earnings growth, not because money is burning a hole in peoples' pockets."
From a commodity price point of view, King thinks that commodity prices are likely to remain firm but will still be the best way to invest is via the equity market. He says the worst scenario would be a too-fast recovery in which governments are not quick enough to drain liquidity and reduce fiscal deficits: "This would lead to another boom bust cycle which would be in nobody's interests."
According to King, a better scenario would be a much slower recovery in which credit growth remains slightly sluggish, people save more and fiscal deficits are reduced. "While the consequence would be lower growth, it would be off a much more stable base, last longer and be more sustainable." Such an outcome would of course reduce the risk of commodity price inflation.
