Global Opportunities - November 2011

Published by Investment Adviser | Nov 14, 2011

The crisis in the eurozone has deepened and broadened. According to the latest IMF World Economic Outlook, spreads on sovereign bonds of economies in the periphery have reached new highs and concurrently, spreads of several other economies have also widened to varying degrees.

Stock prices have suffered sharp corrections, dragged down by concerns about weak activity and financial sectors in advanced economies.

The IMF now expects the world’s economic output to increase 4 per cent in both 2011 and 2012, compared with growth of 5.1 per cent in 2010. In June, the IMF had forecast slightly more robust growth rates of 4.3 per cent for this year. It also sharply reduced its forecast for economic growth in the US this year to 1.5 per cent, down from 2.5 per cent in June. It also lowered its expectations for growth in 2012 to 1.8 per cent from 2.7 per cent.

Christine Lagarde, IMF managing director, says: “Overall, global growth is continuing, but slowing down. The advanced countries in particular are facing an anaemic and bumpy recovery, with unacceptably high unemployment.

“The economy in general is in a dangerous and uncertain phase — there is clearly a darkening outlook and adverse risks.”

After emerging from the 2008 financial crisis and recession, the global economy was hit by a series of shocks in the first half of 2011.

The earthquake and tsunami in Japan caused widespread supply disruptions and the Arab spring political uprisings led to a spike in oil prices. But those temporary shocks have given way to more fundamental issues, including unsustainable levels of debt and political challenges to resolving long-term deficit problems.

The IMA’s Confidence Index, revealing investors’ outlook for the market in the next 12 months, shows a drop in confidence compared with six months earlier. This may have been influenced by the ongoing market volatility and decline in stockmarkets seen in September, when the survey was undertaken.

Although confidence has declined, investors’ belief in equities appears to be holding strong. Looking at those investors who plan to take out a new product in the next 12 months, 49 per cent intend to invest in equities, even though only 6 per cent say it will be the least risky asset class to invest in. More than a quarter say they will invest in fixed income products, while 17 per cent plan to invest in commodities.

However, investor confidence in the UK has held strong, with 51 per cent planning to invest in UK securities in the next 12 months, compared with only 11 per cent in eurozone securities.

Although only 21 per cent of investors plan to invest in the Far East, their belief in the potential returns of the region is high, with 30 per cent saying it will produce the best returns in the next 12 months.

Jenny Lowe is features editor at Investment Adviser