Still, the composition of the economy is changing, at least in the U.S., notes Joe Carson, senior vice-president of global economic research with AllianceBernstein in New York. Exports are playing a much larger role in the recovery than they have in previous recessions and have surpassed such traditional drivers as consumer durables and housing. What’s more, the chief destination of U.S. imports has been, since 2006, emerging rather than developed markets.
In turn, that reflects another sea of change. Emerging markets, with better trade balances and, what’s more, thrifty consumers, seem poised to benefit—not so much from continued exports to the U.S. market but simply through the growth of domestic demand. The emerging market share of world consumption has doubled, to 52%, since the beginning of the decade, reports Carson. The emerging market share of global GDP has also increased, largely at the expense of Europe.
“Europe could be in a very problematic state going forward, and I think a lot of it is underpinned by the poor demographics it has: it has an aging population, a workforce that’s in decline [and] productivity that’s falling,” says Borzellino. “I think what we’re seeing is the outcome of a lot of states in the eurozone that are having difficulties because of high debt loads and a falling tax base. So the leadership will change regionally. And emerging markets? Clearly, they’re benefiting from this. But it doesn’t mean that it ends just with Europe. I think a lot of western economies are going to start falling into the same sort of condition that Europe is falling into.”
Indeed, that may signal a shift in global economic leadership—away from indebted developed countries. But it’s too soon to tell, adds Marchese.
But that leads to another theme—namely, the financial stability of a company. Lots of formerly impaired banks leaped forward in 2010—the ones that had to pay their dividends to the government. But dividend payers in general didn’t fare so well. That’s an anomaly insofar as growing numbers of retirees and near-retirees are going to look to dividends to provide a little extra juice over secure government bonds. Adatia expects to see many companies put a renewed focus on dividends.
Then there are bonds, specifically U.S. government Treasuries (though yields on Canadian bonds are similar). They are still trading below 4%. Is there value there? Meyer suggests not. Long-dated U.S. bonds have historically paid 2.6%. If they’re trading around 3.6%, that suggests inflation of 1%.
Still, says Borzellino, “I think investors should be holding bonds for diversification reasons. If you’re looking at bonds for the return impact, you’re going to be disappointed because further out, we do anticipate that inflation will be taking hold a little bit and will be eroding bond prices and bond values.”
More generally, given the unexpected market collapse of 2008/2009, should investors be doing more to protect themselves against risk? Rather than keeping a sharp eye out for new risks, asset managers counsel remembering the old risks.
“I don’t think we forget about risks after we solve them and move forward. I think we forget about the old risks,” says Adatia. Citing derivatives, he argues, “People didn’t know about the risk; [they] just didn’t realize the magnitude of those risks. Over time, you will get back into those risks again, and, hopefully, we’re better prepared [to manage them].” BC
Scot Blythe is a freelance writer in Toronto.
rsblythe@hotmail.com
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