In the next 6-18 months there will not be a recession, but a tepid growth of the economy. This is the forecast of Francisco Torralba, senior economist at Morningstar Investment Management (MIM), who also forecasts an increase in inflation and credit and financial risk in developed countries and in China.
After the Greek and Chinese crises catalysed attention on the financial markets in the summer months, generating high volatility, operators are thinking about what the key economic issues will be for the next few months. And there are risks. The long period of low interest rates has increased the risk of a bubble and therefore of a sudden fall in the prices of risky assets, particularly in US equities and high yield bonds, but partly also in the real estate market.
Risk-emerging
The future rate hike by the US Federal Reserve, expected by the end of the year, represents a risk factor for some emerging countries. The CitiFX Early Warning Signal Risk index, which monitors this variable, signals that in the last quarter the danger level has increased in all developing areas, "but it is still in neutral territory", says Torralba. Vulnerability has increased above all in the Asian continent, particularly in China, but the continent most at risk seems to be Latin America, above all Chile, a nation very exposed to fluctuations in the prices of raw materials.
The divergence in monetary policies, especially the coming tightening in the US, weighs on emerging currencies. Among the most vulnerable countries are Turkey, Brazil and South Africa. The repercussions on the local currency debt market have already been felt. This asset class has, in fact, become less attractive to international investors. “Emerging countries must balance the need to reduce interest rates to provide liquidity to the market and support growth, with the need to have high yields that become attractive for foreign capital”, explains Torralba.
Beware of China
The main systemic risks seem to derive, according to the Morningstar economist, from the areas that have not experienced the 2008-09 crisis and are more dependent on Chinese growth. If the ex-Celestial empire can become the giant with feet of clay, the alarm bells are also ringing for Latin American and Southeast Asian exporters.
According to MIM estimates, China's gross domestic product will rise by 4-5% over the next two years, less than expected (6-7%). Furthermore, a domestic financial crisis remains a major danger for the country. So far Beijing has shown that it knows how to handle the situation, but the market's reaction to the devaluation of the yuan (the local currency) has shown how sensitive global markets are to what is happening in the Far East.
Le Grexit is no longer scary
Europe also has to deal with internal problems. If Grexit (Greece's exit from the Union) appears increasingly distant, the real weak point, for Torralba, is represented by the banking systems Italian taste and French, given the mediocre rates of economic growth.
Investors, on the other hand, can set aside fears of deflation as there are signs, albeit moderate ones, of a recovery in the price index. As regards the economic cycle, its end is not near, because there are economies, such as Europe and Japan, which still need expansionary monetary policies. This balances out future Federal Reserve tightening.
