CARMIGNAC'S 2012 OUTLOOK
“The worst is over but growth policies are needed in Europe” says Frédéric Leroux, general manager of Carmignac Gestion, the Parisian boutique with 45 billion assets under management founded by Eduoard Carmignac, the man of the pressing letters first to Jean Claude Trichet and then to Mario Draghi, to obtain a Fed-style ECB. And now after Draghi has finally cut rates and launched important unlimited refinancing operations, what do you expect for 2012 from the investment house that has become famous for its performance in the crisis? “For us the crisis was destined to get worse and it has actually gotten worse – commented Leroux – the worst is passing but in the coming months we expect a Europe that is still in crisis. Current growth does not allow public debt to be stabilized, while a change in sentiment requires more sustained growth rates that will enable debt equilibrium to be reached in 2012: alongside budgetary policies, policies for growth are now needed”.
EUROZONE STILL IN CRISIS, GROWTH IS NEEDED
The most critical cases on Europe's table will still remain Greece and Spain, which add up to other European unknowns. “Will Greece have to leave the eurozone?” asks Leroux, who explains: “The debt reduction allowed by the organized default will soon prove insufficient in the face of the country's inability to grow and raise taxes”. In Spain, on the other hand, there is the risk of a serious vicious circle. “Spain has made efforts to reduce the deficit but this will hardly be able to reabsorb the debt. The shock therapy that the country inflicts on itself in terms of reducing the budget deficit destroys growth which in turn prevents the improvement of the budgetary situation - says Leroux - Among the Greek and Spanish risks, those deriving from the elections in France or also from the economic situation in Germany (negative growth expected during this quarter as in the previous one), the European situation remains particularly difficult”. The good news is that systemic risk has moved away from Europe. And this thanks to the positive intervention of the ECB by Draghi and the auction of unlimited refinancing.
"This indirect "quantitative easing", through which the ECB provides the banking system with all the liquidity it needs and which constitutes a way to replace the Central Bank as lender of last resort to sovereign issuers, temporarily removes systemic risk" , says Leroux. This means that banks' bond maturities have found shelter and that the greater liquidity in the system will help the recovery of share prices in the short term. Yet it is not enough to ward off the risk weighing on the future of the eurozone. “The ECB will have to be more conciliatory – says Leroux -. Of course, Draghi's more courageous policy is already starting to have the first positive effects on the easing of the spread. The effect on the short-term curve was very important because it is an essential event for long-term rates to fall as well. Sooner or later, however, the ECB will have to become a lender of last resort”. In short, for the salvation of the Eurozone a more expansionary monetary policy must be added to a budgetary policy that allows for the support of activity. “The first – explains Leroux – must fix the reference rates at a very low level and demonstrate an unlimited ability to purchase the most weakened government bonds, in order to considerably lower the cost of financing public debt and the quotation of the euro. The second must encourage investments, potential tools for growth and the creation of new jobs".
UNITED STATES, BEWARE OF THE POST TSUNAMI EFFECT
In the USA we are perhaps at the beginning of a structural improvement in the real estate market. There are elements that make us think that the worst is over. The United States unquestionably recorded a recovery of their economy in the fourth quarter, which made it possible to revise upwards the growth forecasts for 2012, to around 2%. Nonetheless, Carmignac signals some obstacles to growth, which will probably remain moderate. “The unemployment rate is going down, it took a while but it should be noted that if it is low it is also because the discouraged are increasing, ie the active population is decreasing – explains Leroux -. Furthermore, in the good state of health of the USA there is also a technical factor linked to the post-tsunami normalization in Japan: the good stability of industrial production is facilitated by the alignment effect connected to the normalization of the production chain interrupted by the Japanese tsunami. The non-renewal of the depreciation acceleration device for companies also risks weakening investments since January. Furthermore, the role of the decline in the savings rate in the resilience of consumption is unsustainable: the global economic situation in no way justifies a 3,5% savings rate, only observed when the real estate bubble was formed, which accentuated the sentiment of wealth." Hence the post-tsunami technical factor and the low savings rate are two factors that risk slowing down growth. Thus Carmignac has doubts about maintaining this dynamic, while acknowledging the solidity of the American economy.
IN CHINA IT WILL BE SOFT LANDING
And China? It will be soft landing rather than hard landing. “As we expected – notes Leroux – Chinese inflation reached its peak at 6,5% in the spring, to then return to 4,2% in November. Growth should therefore drop at a rate of between 7% and 8% in 2012, under the delayed effect of monetary tightening and the slowdown in world trade”. The expected maintenance of a high level of activity allows the monetary authorities to reverse their restrictive policy only very gradually in order to reduce inflation forecasts as much as possible. Therefore we should not see an acceleration of Chinese easing. "Economic policy, increasingly based on the development of Chinese domestic demand, requires an established anti-inflationary discipline and guarantees a positive contribution over time to the growth of the rest of the world", notes Leoruc. Which then suggests that the yuan will continue its appreciation trend accompanied by the other currencies of the area, compared to the currencies of advanced economies.
