|
|
|
|
|
|
|
12-03-08
|
Market Commentary: Robust Old World
|
|
In the fourth quarter of 2007 the US economy lost much of its growth momentum, expanding by just 0.6% quarter on quarter. We have cut our forecast for the current year and assume
that the first half of the year will be marked by two quarters of economic contraction. However, we have not changed our scenario of economic recovery in the second half of the
year as the cuts in the federal funds target rate and the US fiscal stimulus package take effect.
In this environment what are the prospects for Europe and the rest of the world? So far they are surprisingly positive. Leading indicators such as the German IFO index have
remained comparatively stable and employment continues to increase. The most impressive chapter, however, is corporate results. Although forecasts for European earnings in 2007
and the current year are also being trimmed, the recalibration is substantially smaller than in the USA. This highlights the fact that, despite globalization, the world does not
march to the same drumbeat. This observation is confirmed by various studies. Table 1 below shows correlations between economic cycles of the different economic regions in the
world over the past 12 years. A correlation of 0.46 between Europe and the USA indicates that if economic growth in the USA declines by 1%, economic expansion in Europe will be
reduced by only 0.46%. The correlation between the emerging markets and the rest of the world is even lower, and at times may turn negative.
According to these data, it appears that there is no justification for automatically transposing the development of the US economy to the rest of the world. However, this result
should not be confused with the circumstance that the correlation between different regions' financial markets is much closer than between their economic development (Table 2). In
times of crisis such as these, this distinction is particularly marked. For us as investors that means: professional diversification by means of multi asset class investment
strategies, which give a strong weighting to modern investment classes such as hedge funds, commodities, infrastructure and real estate, and inflation-protected bonds.
Table 1: Real GDP correlation
Correlation coefficient (1995-2007)
|
USA
|
Japan
|
Europe
|
China
|
India
|
Russia
|
|
USA
| | | | | | |
|
Japan
|
0.42
| | | | | |
|
Europe
|
0.46
|
0.09
| | | | |
|
China
|
-0.03
|
0.62
|
-0.48
| | | |
|
India
|
0.12
|
0.35
|
-0.48
|
0.56
| | |
|
Russia
|
-0.08
|
0.20
|
-0.08
|
-0.12
|
-0.08
| |
Table 2: Stock market correlation
Correlation coefficient (1995-2007)
|
USA
|
Japan
|
Europe
|
China
|
India
|
Russia
|
|
USA
| | | | | | |
|
Japan
|
0.42
| | | | | |
|
Europe
|
0.78
|
0.44
| | | | |
|
China
|
0.42
|
0.25
|
0.30
| | | |
|
India
|
0.26
|
0.32
|
0.32
|
0.29
| | |
|
Russia
|
0.42
|
0.33
|
0.40
|
0.36
|
0.26
| |
|
|
Dr. Thomas Steinemann
|
|
| Chief Strategist of the Vontobel Group |
|
| +41 (0)58 283 78 44 |
|
Contact
|
|
|
|
|
|
|
|
|
