CAIRO: Emerging markets will be the main drivers of economic growth for the next five years, according to Robert Parker, vice president of asset management for Credit Suisse.
“Not that the developed world will go back to recession… We shouldn’t write off the developed economy, but the next few years will clearly be painful. Unit labor costs, dealing with budget deficits and levels of unemployment will be difficult,” Parker explained.
Speaking at the Egypt International Economic Forum, Parker highlighted global market trends and traps for the coming years, couching his information in the premise that the post-financial crisis context primarily represents a fundamental shift towards developing economies.
The rate at which much of the world overcame the worst economic outlook since the 1930’s owes its rapidity to Asia, Parker explained, and secondarily to Latin America.
“Let me give you two statistics,” he told Daily News Egypt after addressing the audience, “For the next five years, the forecast for growth in emerging markets that are part of the G20 is 6.7 percent. The growth forecast for the developed economies in the G20 is 1.1 percent.”
Balancing act
Confirming the concern that stimulus-driven recoveries in the US, Europe and Japan will begin to fade in the second half of 2010 and into 2011, Parker advised investors to “follow closely the size of central bank balance sheets.”
“In the US, the Federal Reserve balance sheet was $800 million” just a few years ago, he explained, “after Lehman Brothers fell, it went to $2.5 trillion.”
Central banks in the developed economies are “not pursuing an exit strategy” for their deficits. Furthermore, consumer behavior has changed; savings rates increased from near zero to 5 percent among Americans. In the UK, savings rates jumped from -2 percent to 8 percent.
“Rebuilding savings is a drag on the economy,” Parker stated. He also warned that the UK’s triple A rating would soon fall, perhaps joining Greece as a triple B economy.
He grinned that Credit Suisse possesses, “Zero government bonds from the US, Europe or Japan. I’m happy about that position.”
Despite the harbingers of continued economic hardship in the developed economies, Parker pointed out that the financial crisis came at a time when developing markets no longer relied so heavily on them.
“If you look five years ago, the global economy was very dependent on the American economy… since then, dependence has sharply reduced because of structural and clerical government growth in emerging economies.”
In particular, regional trade flows and increasing trade between Asia and Latin America allowed economies such as Egypt’s to come through relatively unscathed. He predicted that like India and China, Egypt would soon have to raise interest rates to control economic growth.
Parker identified purchasing managers indices (PMI) as a particularly useful barometer for its capacity to predict market activity three to four months in advance. PMI calculations include information from factories on production level, new orders from customers, speed of supplier deliveries, inventories and employment level; taken together en masse, a rating over 50 indicates economic growth, under 50 represents recession.
Fluctuations demonstrate the relative monthly health of inflation and production. For example, China’s total PMI is expected to reach 60, while Chinese GDP growth will slow from 11 to 9 percent. Parker joked that the Chinese government always forecasts 8 percent growth because 8 is considered auspicious.
Parker gave a few tips for finding solid investments: companies that pay high dividends, have low leverage and limited surplus capacity. He also advised investors not to maintain a regional outlook, but to examine a sector’s global presence as a whole.
He listed the IT sector, health care, infrastructure development and pharmaceuticals as areas that Credit Suisse advises clients to put their money, but cautioned against the auto industry, the airline industry, and the banking sector. Specifically, he named Caterpillar, Nestle and EDF Renewable Energy as three companies he would invest in.
“Basic needs — food, water, household goods — these are some of the strongest investments,” he said. Energy costs also represent a critical factor in the global economy. Although he predicts oil prices to remain steady at around $80 a barrel, he smiled as he pointed out that Saudi Arabia, the world’s largest oil producer, recently built a solar-powered desalinization plant.
Of Egypt, he referred to a “big opportunity with foreign investment from the Gulf, [which has access to] capital with the oil price at $80 a barrel, bringing a strong capital flow into Egypt.”
He added Egypt’s potential as a regional trade hub, as well as its diversified economy.
“The problem in the GCC is that they are dependent on energy. If you look at sectors with long-term potential, these are infrastructure, healthcare, wireless telecommunications, manufacturing household goods, food and water… The opportunities for Egypt are clear. The question I can’t answer is whether Egypt will take advantage.”
An audience member admonished Parker for not including the impact of the crisis on poverty levels or forecasts for poverty reduction. He acknowledged the criticism, but expressed optimism that restructuring the G8 into the G20 represents “a strong positive development.”
