Global General

Special

Newsmaker

Asia Pacific

America

Middle East

Europe

Africa

Unremitting gloom and capital flight await new week

(Agencies)
Updated: 2008-11-17 09:02

LONDON -- Investors enter the week surrounded by unrelentingly poor global economic news, fading hopes of a significant end-of-year stock market recovery and a growing reliance on governments coming to the rescue.

Attention is likely to be particularly keenly focused on Britain, a G7 economy from which investment is fleeing; Russia, which has been in free fall; and on global interest rate and tax policy.

But investors are also desperately sifting through the market wreckage for new investments that may bring returns after a year of mind-numbing losses for many.

"We are sitting at a point where the data is unremittingly gloomy, so any sign of life would be comforting," said John Stopford, head of fixed income at Anglo-South African firm Investec Asset Management.

Investors are being battered by a wave of economic indicators pointing to recession in the United States, Britain, Germany and the euro zone as a whole, while major emerging markets are toppling.

This is leading in many cases to investment flight.

Few places are currently under pressure as much as Britain, where growth has tumbled, unemployment has spiked and interest rates have been slashed.

Sterling has lost a quarter of its value against the dollar over the past 3-1/2 months and is down nearly 8 percent this month alone.

On a trade-weighted basis, the pound hit a 13-year low against other currencies last week and a new record low against the euro.

This is showing up in fixed income investments.

"After a 12-month period of relatively stable flows of foreign capital into and out of UK fixed income instruments," Bank of New York Mellon analyst Neil Mellor wrote last week, "since mid-September we have been registering extremely heavy outflows."

He estimated the outflows from UK fixed income instruments since September 10 have offset around 75 percent of the inflows seen since the start of 2004.

The flight is unlikely to be reversed by the Bank of England. Just days after it slashed rates by 1-1/2 percentage points to 3.00 percent, Governor Mervyn King said last week it was prepared to cut rates further if needed to refloat the economy. That left many investors expecting rates of just 1.5 percent or even 1 percent next year.

Meanwhile, once-booming Russia is being clobbered by investor capital flight, triggered by a mixture of economic concern, falling oil prices and unease over the potential for political intervention.

Last week the authorities allowed what was effectively a 1 percent devaluation of the rouble against their euro/dollar basket, and investors are concerned about more if oil continues to fall.

Russian stocks, meanwhile, have shed more than $1 trillion since May with the dollar-based RTS exchange (.IRTS) falling 73 percent since the beginning of June.

EARNINGS RECESSION

It is also becoming apparent to many investors that a hoped for year-end rally on stock markets may well not materialize.

MSCI's main gauge of world stocks, its all-country index, is heading for its sixth consecutive month of losses, down around 45 percent for the year to date.

The current batch of US and European earnings have done little to lift spirits despite lowered expectations and about as many surprises on the upside as on the downside.

Neil Dwane, European chief investment officer of fund firm RCM, noted that companies are still reporting results that trigger sharp stock falls, suggesting that corporate gloom is still not properly priced in.

"Falls of 10 percent suggest the market is too optimistic," he said.

It has all led some investors to predict a severe earnings recession next year. France's AXA Investment Managers, for example, is forecasting an overall global earnings decline of 25 to 40 percent over two years.

Despite this, a number of leading investors have begun looking at corporate debt, which is seen as having priced in too much gloom.

Stopford of Investec, for example, reckons the current price of corporate bonds globally is assuming a far greater economic disaster than the Great Depression.

GOVERNMENT HELP

Little wonder, against this economic and market background, that investors are becoming increasingly reliant on governments and central banks to dig them out of the hole.

Following the weekend meeting of G20 political leaders in Washington, the focus is likely to be on new stimulus packages and tax cuts to re-inflate consumer spending.

Announcements of such plans in the past have lifted stock market sentiment, but often only for a brief time.

Stock markets, for example, rallied sharply a week ago after China announced a nearly $600 billion stimulus package, but it fizzled rapidly with world stocks falling for most of the week.

Meanwhile the relative absence of inflation -- the result of falling global demand -- is allowing central banks to cut or promise to cut interest rates.

On Wednesday, the Bank of England publishes the minutes of the November 6 meeting when it slashed rates. The Bank of Japan will announce its latest decision on Friday.