The biggest challenge and greatest opportunity for investors entering 2013 is to decipher where the wind is blowing before sailing into the unknown. With the fiscal cliff engulfing the year-end, investor sentiments and the potential for increased volatility is set to play a greater role in the short-term direction of financial markets.
BizHive Weekly derives the conclusion that a well-diversified portfolio that includes multiple asset classes is vital in 2013 as the investment environment continues to be challenging.
Synchronized global downturn in 2013
Four years after the eruption of the global financial crisis in 1998, the world economy is still struggling to recover from the economic ‘hurricane’ that swept thousands of investors into the red, with many of them left hanging, not knowing where and when is the right time to cross the boundaries once again.
The eurozone financial market and sovereign distress, stuttering recovery in the US as well as softer-than-expected growth in major emerging market economies were the main drivers behind the Inter-national Monetary Fund’s (IMF) downward forecast for global growth to 3.5 per cent for 2012 and 3.9 per cent for 2013.
Global growth dropped to almost three per cent in 2012, which indicated that about half a percentage point had been shaved off the long-term trend since the crisis emerged.
However, an international research organisation, The Conference Board’s (TBC) economic working papers showed that the outlook for 2013 and beyond suggested some effects of a modest recovery in advanced economies, which would bring these countries to an average growth of 1.8 per cent between 2013 and 2018.
Even though growth in the advanced economies was expected to recover beyond 2013, there would be major offsetting effects from continued slower growth in the emerging markets, it concluded.
Based on current trends, global gross domestic product (GDP) was projected to grow at three per cent from year 2013 to year 2018, and then showed a further slowdown to 2.5 per cent from 2019 to 2025.
“At present, on average, global growth will still somewhat be higher than the period 1980 to 1995, but about a full percentage point below the growth rate from 1996 to 2008,” TBC stated its the recent report.
United Nations’ (UN) World Economic Report 2013 also pointed out that the economies in developing Asia had weakened considerably during 2012 as the region’s growth engines particularly China and India, both shifted into lower gear.
“While significant deceleration in exports has been a key factor for the slow-down, the effects of policy tightening in the previous two years has also lingered,” it added.
In terms of outlook, growth in East Asia was forecasted to pick up to 6.2 per cent in 2013, from an estimated of 5.8 per cent in 2012.
GDP growth in South Asia was expected to average to five per cent in 2013, up from 4.4 per cent of 2012.
Inflation-wise, it was expected to remain subdued in most of East Asia, but was still a concern for most countries in South Asia where inflation rates were, on average, over 11 per cent in 2012 and the forecast would remain above or near 10 per cent in 2013 and 2014.
Whether or not, there would be any risk of a double-dip global recession remained to be the biggest question among investors and analysts alike.
Greece, Italy, Portugal and Spain were expected to take further austerity measures in 2013, with deeper cuts than assumed in the baseline.
As a result, the estimated output losses in these economies would be between one and two percentage points in 2013.
In conclusion, the whole economy of the euro area would shrink by 0.9 per cent compared with the baseline fore-cast for 2013.
UN revealed that from 2013 to 2015, the cumulative output loss for the euro area as a whole would amount to 3.3 per cent.
The further weakening in the eurozone would spill over to the rest of the world and the cumulative loss of global output would amount to 1.1 percentage points.
In the fiscal cliff scenario, UN stated that the world economic growth would slow to 1.2 per cent in 2013, compared with 2.4 per cent in the baseline.
The cumulative output loss between 2013 and 2015 was expected to be 2.5 percentage points.
The US economy was expected to enter into recession and Japan as well as the EU would also be severely affected, with output losses of about two percentage points during 2013-2015.
East Asian and South Asian economies would see cumulative output losses of about 1.6 percentage points and 0.5 percentage points, respectively.