The route to recovery

It’s tempting to notice the eerie similarity between the rock bottom sentiment of 2001-3 and the current gloom. And to hope that the mother of all booms is taking shape. Are we at the proverbial darkest hour before the dawn? Equities are a cyclical asset class. Cyclicality demands that ‘reversion to the mean’ plays out precisely when things go back to the bottom, right? The answer is yes and no. Economic history suggests that the human race will figure out a way to claw back from the brink to create yet another boom. But right now, there’s very little hope that this can start next month. Yet, there’s nothing that proves it can’t happen in another year or two.

Wise investors recognise this unpredictability and watch out for real evidence (not ticker news or opinions of consultants) to detect the first signs of economic recovery. A massive clean-up of toxic assets is a prerequisite for sanity to return to the global economy. This may happen in a few swift moves— painful write-offs, followed by restructuring, capital infusion and perhaps bank nationalisation—or over a number of years.

A number of economic shifts have already begun in some global economies. China is moving towards a consumer-driven economy from its current status as the global supplier. What are the opportunities that this holds for the rest of the world? And how will China face up to increased US protectionism now that it is the single largest holder of the US government treasury bonds?

India might step up infrastructure creation to recharge its capex cycle, which would bring back capital goods and construction into focus. Hopefully, this will be accompanied by the much-needed investment in education, sanitation, healthcare and urban infrastructure. It is not clear how India will tackle the erosion of demand in IT services and whether it will be able to manage the backlash of unemployment in this sector when the US tightens the screws on outsourcing. Nevertheless, in terms of sheer numbers, China and India will stand out globally for their incremental contribution to global capital formation, income growth and consumption over the next decade.

We may witness a multi-year contraction in the conspicuous consumption in the US and some western economies. The path that Japan and many Eurpoean countries will take is not clear. Then there are the massively enriched, but increasingly insecure nations of West Asia. Many of them are sitting on seemingly inexhaustible oil reserves and a powder keg of terrorism. All this makes for a heady global cocktail of geo-political risk and economic dangers intertwined with opportunity. I am tempted to re-use an old phrase to describe the flux we live in: this time it’s different.

—Dipen Sheth is the Head of Research, Wealth Management Advisory Services.