Terence Mahony, Executive Director, Research from leading multi-manager specialist IMS looks at the gravity of the credit crunch and a potential global food crisis.

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Musings from Indochina
The Cambodian stock market is set to launch in September 2009; property prices in Phnom Penh have risen five-fold in 18 months and consumer spending is rampant.  Vietnam remains attractive as an economic growth story with valuations at more reasonable levels. Current prices provide an opportune entry point for long term investors and Frontier markets are the new jewels of emerging markets.
 
The Uncharted Voyage of the Fed
The current crisis is the most serious since the 1930s, putting the US on the brink of total systemic risk.  Ben Bernanke has taken unprecedented measures beyond the remit of the Fed’s mandate by lending to brokers, accepting mortgage-backed securities as collateral and bailing out Bear Sterns. The massive amounts of liquidity injected into the system by central banks, and cut in interest rates, have stabilised credit markets.
 
Food Shortages
As soft commodities have soared, food prices have risen surreptitiously putting pressure on the consumer in the developed world and developing economies. Food in the developing world is critical to social wellbeing and political stability.  A cause of concern in Asia is the rising price of rice, the staple diet of 3.75 billion people.  Rising food prices could be a social time bomb ticking away in the developing world.
 
The US – L U V W
The above letters are graphic representations of four possible economic scenarios:
L     An economy that remains stagnant for the foreseeable future – unlikely given the Fed’s pump-priming;
U     A gradual recovery leading to sustained growth – the most positive scenario allowing current credit problems to be resolved and the construction of solid foundations of future growth;
V     A sharp rebound which would be welcomed by interminable bulls but could lead to renewed excesses;
W    A double-dip recession which would be the worst of all outcomes as short-lived recovery would be dashed by a renewed recession: this is not impossible as tax rebate checks in May could lead to false consumer security
 
The outlook for the US economy continues to deteriorate with job loss numbers at 80,000 and unemployment rising to 5.1%.  Rising fuel and food prices are dampening consumer confidence.  The key to the bottom of this cycle will most likely be when housing prices bottom out, expected to be later this year or early 2009.

Europe / UK
The Euro economies have proved quite resilient led by strong exports. German business confidence rose for a third consecutive month in March and the mood in France remains positive.  In the UK, forecast growth rate for 2008 was lowered by a further 0.25% to a range of 1.74-2.5%. As the economy weakens it is likely that the Bank of England will continue to lower rates, as seen on 10 April, which will not favour Sterling.
 
Japan
The latest Tankan review reported the fourth consecutive month of deteriorating business conditions.  Political gridlock has prevented Parliament from naming a successor to Mr Fukui as head of the Bank of Japan. The country appears to be adrift under Mr. Fukuda, who has failed to articulate a clear economic vision, and slowly drifting into recession
 
Asia Ex-Japan
Asian markets had a difficult first quarter due to internal specific problems - growth only slowed by about 0.5%.  Growth in China continues at almost 11%, but inflation in March reached 8.7% and monetary policy continues to tighten.  In India, foreign investors have been net sellers and inflation is proving a problem - the market is approaching an attractive entry point again.  Hong Kong has been dragged down by the mainland market but has reached an attractive valuation level.  The other two markets of interest are Taiwan and Thailand.
 
Outlook
The global financial system still needs the survival of the US system, since the rest of the world still does not have either the scale or depth of the US markets, although they are considerably richer in reserves.  There may well be a bear market rally, which would restore some consumer confidence and make the W scenario a reality.  There are just too many remaining uncertainties regarding the global economy, the outlook for earnings, inflation, food prices and credit risk to be overly optimistic at the moment.  
 
Conclusion
A new world order is being established, which will inevitably lead to the ultimate decoupling of emerging markets from the developed world.  Merrill Lynch states that for every US Dollar of global growth in 2008, 78 cents will come from emerging markets.  Brazil and Russia offer attractive opportunities on the back of their commodities, as well as the Middle East with its unlimited cash flow on the back of oil.
 

Terence Mahony