After the credit crisis has played out in the financial sector, and led to dramatic rescues of some of the biggest players, what’s next in the global markets? As governments seek to address problems that have frozen interbank lending, new risks are emerging. These include worries about a sharp decline in consumer demand and a slowdown in investment due to the credit crisis. This environment will hurt earnings across industries. Slower economic growth also will contribute to lower earnings.
“There will be lots of bad news” from companies in coming months, according to Beat Wittmann, chief executive officer at Julius Baer Investment Products, speaking on at a regular in-house panel on markets and investing. Global growth is expected to slow to about 2.4% in 2009, less than half the level of 2007, according to Janwillem Acket, chief economist at Julius Baer. The bank has lowered its forecast from 2.9% previously expected for growth in 2009. That will be slower than the projected 3.6% in 2008, and less than half the pace of 2007, when the world’s economy grew about 5%.
The slowdown in the US, the world’s largest economy, could persist into 2010, and this also will be reflected in stock prices. “If we see a recession of one or two quarters, that is probably already reflected in prices,” said Scilla Huang Sun, Head Equities at Julius Baer Investment Products. A recession that lasts longer would likely increase pressure on stocks, she added. Investors should avoid “cyclical sectors, including car makers” and focus on defensive sectors.Earnings forecasts for many companies are still too high.
Apart from equities, credit markets also are expected to see clearer separation between borrowers. Here the process is complicated by risks that currently make liquidating positions difficult and hedging nearly impossible, according to Bruno Knechtle, Head Fixed Income at Julius Baer Investment Products. Bonds of Iceland’s three big banks, Kaupthing Bank, Landsbanki Islands and Glitnir Bank, have fallen to a value on secondary markets that has left them virtually worthless. Some other bonds of financial companies have shown signs of recovering at least partially. In emerging markets, investors need to differentiate on a regional basis. The Baltics are being closely watched, as is Hungary, and some other regions. However large emerging market countries have stockpiled foreign currency reserves sufficient to put them in a relatively strong position, according to Stefan Hofer, Emerging Markets Equity Strategy at Julius Baer.