Economic crisis: Will it end in 2009?
In the first half of 2008 investors believed that the financial crisis and its economic fallout would remain US-centric. Non-dollar assets like commodities and European bonds were the preferred investment vehicles as demand turned away from dollar.
In the second half, however, markets witnessed sharp corrections demystifying the earlier belief and investments turned to safe havens like US treasury securities resulting a dollar gain against other asset classes.
2009, is also anticipated to play differently in two halves while initially concerns about the global recession and the financial crisis will dominate creating a natural bid for the dollar. However, the second half might see signs of a bottoming out led by the US and gradually we might witness investments flowing back to high yielding asset classes like emerging market debt and equities.
The investment sentiments may not lead to betterment of macro indicators like growth and employment immediately; however, any less worsening of these indicators will only boost investor confidence. Efficient markets and global integration are reasons why a swifter recovery is anticipated.
The risks, specifically for emerging markets could be that investments initially remain US-centric. The bigger risk, of course, is that there are no signs of a recovery and the global economy continues to decelerate. At this stage there are few signs that a bottom to the asset and business cycles could be in sight soon. There is some improvement in the short-term money and credit (commercial paper, for instance) and the hope that the Obama administration’s aggressive fiscal plan would produce results relatively soon. On the other hand, the possibility of a sustained decline in consumption and weakness in non-residential investment remain key risks.
