Resource Search

The third quarter 2012 issue of Global Foresight focuses on emerging markets. David P. Harris, Chief Investment Officer, assesses prospects across emerging markets. Jimmy C. Chang, Senior Portfolio Manager, delves further into emerging market investment opportunities and examines the trajectory of the largest emerging economy, China.

In the aftermath of 2008’s “Great Recession,” businesses have been more risk averse and held larger cash reserves. This has been a mixed blessing, slowing growth while reducing the likelihood of another economic collapse.

After decades of decline, the U.S. manufacturing sector may be on the verge of a comeback. This resurgence is the result of numerous factors, including fast-growing wages in China and other emerging markets. While this developing trend should provide a modest lift to U.S. economic growth, certain industries and companies may stand to benefit more substantially.

If Congress doesn’t act by January 1, 2012, policies will automatically take effect that will reduce the 2013 deficit by $607 billion, or about 4% of GDP. While this policy, commonly referred to as "walking off the fiscal cliff," would be a near-term disaster, an extension of 2012 fiscal policy that fails to address increasing indebtedness could actually represent the worst long-run outcome.

Rockefeller Financial Managing Director Jimmy Chang looks at Greece's possible exit from the euro, the cooling of global markets and Facebook's disappointing IPO.

Interest rates continue to bump along near historical lows. Given the asymmetric risk/reward of holding bonds with extraordinarily low yields, some investors have been reconsidering their holdings. Investors worried about rising interest rates have several options (among them, shortening duration and using derivatives), but none are without opportunity costs and implementation challenges.

We anticipate a period of market consolidation leading up to, and including, the summer and would not be surprised to see more elevated levels of volatility. However, over the longer term we see risk assets continuing to be supported by valuations and abundant liquidity, although tail risks to growth from global fiscal policy remain.

Equity markets around the globe took a breather from the prior six months’ impressive run-up. Since the 2011 low on October 4, 2011, the MSCI World Index had rallied 22% by the end of March 2012. A mild pull-back is thus nothing unusual. However, the financial market optimism exhibited in the first quarter of 2012 has been tainted with a dose of uncertainty (or perhaps reality) of late. The European sovereign debt crisis has made its presence felt once again, just like the hockey mask-wearing Jason Voorhees character in the Friday the 13th horror film series.

With the looming December 31 expiration of the Bush tax cuts, the threat of sequestration, and the need to raise the debt ceiling in January, neither Democrats nor Republicans will want to face the consequences of inaction and/or no agreement. The nature of these issues and the convergence of interests and deadlines lead us to predict a deal that fully or substantially avoids sequestration, partially extends the Bush tax cuts, and raises the debt ceiling.