“The European debt crisis and fears of a recession in the USA will keep investors’ risk aversion at a high level in the coming months. Either economic policymakers introduce bold measures now, or recession can no longer be averted,” the report added.
The European Central Bank (ECB), the report said, as well as the US Federal Reserve (Fed) will be forced to counter the cooling economy with even more relaxed monetary policies. A third round of quantitative easing (QE3) by the Fed looks very probable and the ECB will have to continue its purchases of Spanish and Italian government bonds.
Due to the high macro risks, it maintained, investors are generally advised to exercise caution. Defensive stocks from the consumer staples and healthcare sectors still have potential, as does gold. Due to the current slowdown in growth, investors would do well to wait patiently for a trend reversal.
“The global slowdown in growth has deepened concerns about the global sovereign debt problem and shaken confidence in the economy. The cost cutting measures planned by governments in the USA and Europe are likely to slow growth further in the coming quarters if policymakers cannot agree to new fiscal packages. The fourth quarter will reveal whether the global economy slips into recession or whether this danger can be averted at the last moment. Much of the weakness is caused by tensions in the banking system associated with the euro debt crisis. The crisis entered a new phase when the contagion spread to Spain and Italy. Italy, in particular, is too big to be saved by the euro bailout package, without affecting the credit ratings of France and Germany. EU fiscal policy coordination and a guarantee of joint bond issues would help to win back investor confidence. However, a haircut for Greece would lead to further contagion and trigger a banking crisis like the one that occurred in the wake of the Lehman bankruptcy,” the report said.
“The highly indebted euro nations are caught in a vicious circle. The more a country saves, the weaker growth becomes. The weaker growth is, the more doubts there are about a country’s ability to grow out of its debts, and the higher credit spreads become. In the end, expectations are self-fulfilling: because if investors do not believe a country is solvent and can demand higher interest rates, the country becomes insolvent,” Jan Amrit Poser, Head of Research and Chief Economist at Bank Sarasin, said.
“If convincing political measures help improve sentiment in the financial markets and thus also in the real economy in the fourth quarter of 2011, investors’ risk appetite is likely to pick up again and support a potential recovery. But if policy fails, investors must expect further setbacks in the financial markets. Due to the high level of political uncertainty, we continue to clearly underweight risky assets in our asset allocation,” Philipp E. Baertschi, Chief Strategist at Bank Sarasin added.
The US economy’s disappointing performance forced the Fed to further relax its monetary policy. In addition to confirming that it will continue its low interest rate policy and implement Operation Twist, Sarasin analysts also think QE3 is likely because the US economy is expected to cool further. In contrast to the Fed, the ECB faces not only a painful slowdown in growth but also a sharp rise in rates on Italian and Spanish government bonds. “
“The global equity indices gave up more than 20% of their value in the third quarter. If the equity markets start to pick up in the fourth quarter, investors should stay cautious and only return to the markets if there is a simultaneous decline in risk premiums and an improvement in macro indicators. Generally, most investors would do best to stay close to their domestic markets due to the high currency uncertainties so as to avoid above-average fluctuations in their equity portfolio.”
“The risk of price fluctuations is also rising for gold. Hence, gold is likely to see temporary profit taking on high gold prices. Nonetheless, demand for gold is expected to climb further. Sarasin analysts see three principal reasons for this: global monetary policy, strong demand from emerging market countries and the high degree of uncertainty surrounding the current sovereign debt problems. Consequently, they advise investors to use falling prices as a buying opportunity,” the report said.