If the current crisis continues, will the Asian and emerging economies cushion the effect for the global economy?

Then Asian growth will moderate, but given the expansionary monetary and fiscal policy in play in the emerging markets, we don’t expect a recession to occur there.  

If all the rescues packages fail, what further interventionist steps can policy makers take to support the economy?  

Then governments will start to implement support measures for the non-financial sector, such as tax cuts or government spending. Theoretically, governments could directly intervene into the real estate markets as well.  

If the outlook for economic growth continues to deteriorate, how will this affect Europe?  

then Europe will also fall into recession. European growth is neither isolated from the US nor from the disruptions experienced in the capital markets. In addition, the European real estate market has weaknesses.  

if the current trends continue, are we likely to enter a recession – either in the US, Europe or globally?

then we will enter a global recession. The emerging markets may get off lightly with growth falling only slightly below potential. Europe, the US and Japan are facing recession.

if equities continue to be volatile, are bonds a refuge?  

then bonds could be a safe haven. However, spread products, albeit cheap against government paper, may still not be a buy. Longer-term, if policy measures prove effective, then inflationary pressures may come back into play and bonds may suffer.

If I am looking to adapt my investment tactics, what do you suggest?

Then the outlook for equities remains difficult for the short term, but they should trade strong in the longer term as valuations are attractive at these levels.

Published by PROJECT M in December 2008