Investors could remain wary into 2012 but will miss opportunity, it is claimed

Sharp declines in global equity markets and weaker than expected economic data have caused investors to worry that the world economy may relapse into another recession but experts believe the concerns will be relatively short lived.

Global growth almost ground to a halt in the second quarter as activity in the United States and Europe faltered whilst Japan remained in recession. Financial markets are extrapolating economic weakness into the second half of the year and probably into 2012. This means investors could be missing buying opportunities.

Few are predicting a double dip recession. ‘We have cut our global growth forecasts but e expect growth to firm in the second half of the year as the disruption from Japan fades and the squeeze on spending from inflation lessens following the decline in commodity prices,’ said Keith Wade, chief economist at Schroders.

‘The main risk to growth is that companies postpone spending decisions due to a loss of confidence. Our view is that the pre-conditions for a recession are not in place in the sense that the private sector has strong cash flow and have little need to sharply retrench. The risk today comes from the public sector which has taken the strain of the financial crisis,’ he explained.

Fiscal policy will tighten next year according to International Monetary Fund figures and, along with the on going Euro crisis, will act as a headwind on global growth. This could see growth dip again, Wade warned. ‘Given the lack of credit growth in the post financial crisis economy, the recovery is less vigorous and more vulnerable to shocks than in past cycles. This suggests that having dodged an immediate downturn, growth is likely to falter again in 2012,’ he added.

The eurozone is fragile, most commentators believe. ‘The politics remains ugly. Greece bail out version 2.0 was missing lots of details, which raised fears that a final agreement may not be reached. Meanwhile Eurozone politicians have gone on holiday while markets panic.

Along comes the European Central Bank to flood markets with liquidity. However, the sovereign debt crisis compounded with the slowdown in US and European GDP growth ensures risks assets continue to sell off,’ said Azad Zangana, European Economist at Schroders.

‘Looking ahead, we continue to forecast slow and bumpy growth, though not a recession for the Eurozone as a whole. On the political front, we expect leaders to finalise the Greek bail out and the upgrade of the European Financial Stability Facility, though we remain some way away from a definitive solution. For now, there is a little more road left for the can to be kicked along, but not much,’ he added.

According to Tom Higgins, global macroeconomic strategist at Standish, the situation is arguably worse in Europe. ‘Unlike the US downgrade, if France were to lose its AAA rating then it could have broader implications for the Eurozone since France is a primary contributor to the European Financial Stability Fund. The EFSF is the main Eurozone bailout facility so any change in France's credit rating would have a direct impact on the rating of the EFSF as well. European policymakers are not helping matters with their piecemeal approach to addressing the sovereign debt problems in those troubled peripheral Eurozone countries,’ he said.

‘Against this backdrop, we have revised down our projections for global economic growth to 3% from 4% in 2011 and believe there is a 50% probability of recession in the US and Europe,’ he added.

Clare Hart, portfolio manager of the JPM US Equity Income Fund believed that investors may be watching world economies with a degree of concern, but the current market volatility is very different from the US downturn we saw in 2008/09.

‘This time around, the economic problems are much better understood and policymakers can take considered steps to counteract the challenges faced. The other decisive difference, that makes a compelling argument for US equities, is the fact that companies' balance sheets are in much better shape compared to the situation we faced three years ago. Unlike last time, corporate credit stability is not a concern and we are not facing the drying up of liquidity that affected companies and markets so critically in 2008/09,’ she said.

‘Given this backdrop, US equity valuations are currently very interesting and recent fluctuations have provided great opportunities. Dividend paying stocks are the ones to watch and we have been picking up good valuations in areas such as the consumer discretionary sector, i.e. restaurant stocks. At the same we've been using the opportunity to increase holdings in financials stocks to benefit from attractive prices in what we call ‘misunderstood' assets in the sector,’ she explained.

‘The message from us is clear, the US equities market offers some very attractive options at the moment. Despite what we expect to be a continuing phase of volatility, we believe now is not the time to reduce your US equity exposure and a high dividend yield approach is a solid strategy to weather the current market environment,’ she added.