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BY ANDY VAROSHIOTIS
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Every economist and financial analyst is predicting a very difficult 2009, but no one knows for sure how bad things will get or who will survive in the financial services industry.
By comparing the current crisis to uncertainty shocks of the last 40 years, we predict GDP growth could be reduced by as much as 4.5%. But, if politicians protect free markets, growth should be back in 2010. This is also known as "The Greatest Transfer of Wealth in the History of Mankind." An unprecedented economic crisis is coming and $10 trillion is going to change hands. It's not what you think, but it will create one of the most lucrative investment opportunities since the Industrial Revolution. According to The Economist, "a fundamental change is coming", and sooner than any of us ever imagined.
In my research I have been looking at the impact of large uncertainty shocks on the US economy over the last 40 years. These events – like the Cuban Missile Crisis, the assassination of JFK, the Gulf War and 9/11 – typically double stock-market volatility and reduce stock-market levels by 10%. Their average impact is to reduce GDP growth by 1.5% in the following 6 months, with a recovery within 12 months.
In comparison, the credit crunch has created a global shock and drove major economies into recession. It has generated an incredible six-fold increase in stock-market volatility and a 30% fall in the stock market level – three times the average impact of the previous uncertainty shocks. Based on these numbers, GDP growth will be reduced by 4.5% in 2009 because of the credit crunch. Since the consensus forecast before the credit crunch for US and UK growth was +1.5%, this reduction in growth leads to a -3% contraction in 2009. Forecasting 2010 is even less accurate, but my prediction is a return to about +1.5% growth.
Balkans
The global financial crisis is inevitably going to strike the Balkans, and the crisis is going to be especially difficult for small and medium enterprises, developing economies and countries that have invested in the Balkan region.
The region has strong reasons to worry about the crisis and its future implications due to the domino effect and not so much as a direct consequence of the crisis in the U.S.
For example, unemployment in Bulgaria is expected to increase significantly but not beyond 10%, with the real estate sector facing the most serious problems and consequences of the financial crisis.
Over 160,000 Romanians have so far been made redundant in recent months with the country entering into stagnation, many investments have been blockaded, and orders from abroad have declined substantially. This trend is expected to continue well into 2009 with Romania's construction, manufacturing and agriculture expected to bear the brunt of the effects of the crisis.
The global financial turmoil has begun to spill over to Serbia, and this abrupt shift in the international environment is likely to slow down credit flows and economic activity across the region The IMF has agreed to a $518 mln line of credit for Serbia to help the country weather the financial crisis. Economic growth rate is expected to decline to 3.5% from the current 7% and the budget deficit to reach RSD 50 bln (EUR 589 mln).
The crisis is affecting Montenegro which is threatened by social unrest as it plunges deeper into economic crisis. The government is trying to fill the financial hole by feverishly collecting customs duties and taxes, issuing bonds and taking out foreign loans. But the country remains heavily dependent on Western donations.
Balkan countries should take into consideration the global developments and create local strategies that will enable their economies to sustain the crisis and overcome all the problems lying ahead. They should seek strategic partnerships with Russia, Ukraine, Moldavia, Greece and Cyprus and set the cornerstone for further foreign investments in the region.
The rising defaults on sub-prime mortgages in the U.S. triggered a global crisis for the money markets. Many of the world’s leading investment banks have collapsed as a result and the U.S. government has proposed a massive bail-out.
“There is no such thing as decoupling,” and the popular theory that emerging markets could sustain reasonable growth rates even while the world’s leading economies suffered through recession. “All equity markets are linked. Each individual economy will be more or less affected, depending on reliance on global trade and commerce.” The recession in Europe will be felt across the board with consumer spending held at a standstill for the good part of 2009 until the middle of 2010.
Using Wall Street terms, I express “cautious optimism” about the state of the financial services industry. The U.S. government’s $700 bln bailout package and the direct infusion of $125 bln to recapitalise the nation’s biggest banks will only help the psychology of the investors with some signs of improvement and things are starting to get better.
As America’s obligations rise into the trillions, at some point investors may begin to question whether a government running huge deficits can also credibly promise that the dollar will not lose its value. Unless something radical is introduced by Mr. Obama’s administration, the U.S. economy will continue its slowdown with companies showing dramatic declines in revenues in balances sheets. Therefore, 2009 will be a very difficult year for Wall Street and for the Global equity markets. There will be a tremendous flow of mergers and acquisitions as companies won’t be able to achieve organic growth, but they will seek acquisition growth to comprehend their balance sheets and enter into a profitable bull cycle towards the middle of 2010.
Finally, the bear market cycle will bring to the investment public some of the most lucrative and profitable investment opportunities of the past 40 years.
Andy Varoshiotis is Executive Director of Harvest Group, a Licensed Financial Principal (MIF) and a Member of the International Financial Planning Association
