Investment downcycle coming, EMs face recession: Jim Walker

What is your outlook for emerging markets?I expect a recession in nearly all of them. The export side in EMs will be particularly weak but, like the developed countries, their corporate profits are being hard-hit. When profits go down, companies take extreme efforts to shore up their balance sheets by squeezing inventories, firing workers and slashing investment. It is the investment downcycle that causes recession. That is what is coming for most of us.How challenging will it be for the Indian government to pull the economy out of the downturn?India is one of the least exportdependent emerging markets and one of the most benefited by a fall in the oil price. Those two factors will help mitigate the effects of global downturn. However, the domestic economy was weak already and we see no sign that the government has really understood the nature of the economic problems facing India. Sub-3% growth is highly likely and it’s quite possible that it could worsen in 2020 at least.Markets have reacted rather indifferently to the fresh stimulus by the Fed. Just a month ago, it was the Fed’s liquidity that was driving stock prices. What is the market telling us?The Fed stimulus has now been joined by the BOE, the ECB and government efforts around the world and still equities are falling. The plain message is that this is not a simple financial crisis that can be addressed by splashing money all over the economy and further reducing interest rates to levels that cause as much damage as good. The real economic effects of the Covid-19 virus are just beginning to be understood and a global recession is all but guaranteed as company profits crash and this moves through the economic system in the form of much lower investments, reduced production, soaring unemployment and reduced levels of consumption (partly financial and partly repressed by lockdown policies). Markets will be volatile with a downward bias for some time to come. Do you think the stimulus measures by governments and the global central banks can avert a recession?No. They can help mitigate a recession over the coming two years but there is no prospect of them stopping one when company profitability has been shaken to the core.There seems to be stress in the US credit markets. Do you see a repeat of the situation in 2008-09?The central bank will do all it can to ease credit market conditions and, like 2008-09, will break the law and existing regulations to do so. It will end up buying paper that it has no legal right to buy but will be forgiven by government because it is a crisis. The real crisis lies at the heart of economic policy-making where all of the meddling in market functions over the last decade in particular have left economies in the developed countries in no shape to take any external shock to the system. We will eventually emerge on the other side of this crisis but the costs of further economic zombification and capital misallocation will be great.What will be the impact of supply-side disruptions on the dynamics in the global economy? How long do you expect the after-effects to last?That is a hard question to answer at this stage. Because of its activityreducing effects, this crisis is both a demand and supply shock. However, if we look to the Asian Crisis (1997) for a roadmap, which is much more relevant than the 2008 financial crisis that spilled over to the real economy for a short time, then the next two years will be particularly rough with global GDP likely to be contracting in 2020 and 2021. Very few economies will be spared although China has the wherewithal and deployment mechanisms to rebound quicker than most others.Are low oil prices here to stay?Probably not. The demise of the oil price has been predicted many times in the past and I suspect this time is no different. Geopolitical goals seem to be playing a part among the producers. Saudi is attacking a weak Iran while Russia is trying to get one over on the US shale industry. But eventually oil producers all aim for one thing, a higher price. Oil demand should keep the price weak for the rest of 2020 but we would expect oil prices to rise again in 2021, back to the US$50-80/barrel range.Is the best phase for gold over?Gold might recover some lustre in the next phase of this crisis because the government will be adding money direct to the economy this time rather than to the financial system which is why asset prices inflated after 2009, not consumer prices. This time the inflation is likely to be much more widespread, which is good news for gold. We would be accumulating slowly at the moment although gold mining stocks probably offer the best value.

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