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The Sky Falls In…

The Sky Falls In…

Get the Prozac out before you read ENBD’s Chief Investment Officer, Gary Dugan, less than optimistic review of the current economic weather.

October 2, 2011 11:03 by

The Euro zone is suffering a crisis of confidence in its banking system. Unless the European Central Bank floods the economy with liquidity there is a risk of a sharp credit crunch. The politicians can no longer tell us the banks are strong they have to show us they are strong. Forced re-capitalisations and potential nationalisations of certain parts of the banking system may be needed to renew global confidence in Europe.

With the fears of the world focussed on Europe the Euro is likely to remain under downward pressure and the dollar a pillar of strength. We still target $1.25 for the Euro over the coming six months. We also expect the Yen to remain a relative safe haven. Sterling has also been caught in the cross-fire weakening from around the $1.60 level to $1.55. Further weakness can be expected with the UK Monetary Policy Committee likely to embark on a further programme of quantitative easing by buying long dated bonds in the open market. Our currency strategists expect a potential re-testing of the $1.50 level.

We remain cautious on international equities. We still believe that there could be 10-15% further downside. The growing realisation that a recession can’t be avoided will lead to significant downgrades to corporate profit forecasts for 2012. Although the third quarter corporate results due to be reported through October wont in themselves be that bad we expect companies to allude to weakening markets. We are already seeing signs of companies in many parts of the world announcing further rounds of job cuts and restructuring. Local equities have performed relatively well. Most MENA equities were cheap relative to international comparisons and the centre of the crisis is far from these shores. Undoubtedly there will be some impact on economic activity in the region. However with the oil price holding up relatively well and most governments still committed to supporting their economies through spending the region can probably look forward to growth in 2012 whilst other parts of the world are struggling with recession.

By Gary Dugan, Chief Investment Officer, Private Banking, Emirates NBD.

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