Is Double-Dip Noise Obscuring Global Opportunities?

Fears over a double-dip recession in the US and globally are dominating investor sentiment, but the strategy team at HSBC Global Asset Management said people could be missing an opportunity in emerging markets as a result.

“When investors fret about double dip risks, US concerns are often automatically translated into global concerns," Philip Poole, the global head of macro and investment strategy at HSBC Global Asset Management, said in a research note. "But this ignores the fact that in large parts of the rest of the world activity remains encouragingly robust.”

Poole said he believes news flow from the emerging world is supportive of an ongoing recovery.

“Investors continue to fear that China’s slowdown becomes a meltdown," he said. "As highlighted before, that is not the HSBC view and the HSBC China manufacturing PMI supports this interpretation with the index returning to expansion territory.”

Poole remains bullish on Chinese and Indian growth. In China he is confident growth will hit 9 percent in the second half and sees few signs of slowing in China despite policy tightening.
With the exception of Japan, Poole also sees signs of life in the developed world.

“Australia’s second quarter GDP release is a case in point … with growth at its fastest pace in nearly two years with consumer spending surprising on the upside and residential building activity robust,” he said.

“Europe, considered a basket case only a few months ago, has also been showing encouraging signs," he said. "EU growth accelerated sharply in the second quarter with German GDP, in particular, very strong. Unemployment is showing signs of stabilizing and leading indicators are also generally encouraging.”

The recent jump in the Conference Board’s confidence index is also encouraging, Poole said, but he said, like many, he believes that jobs data will be crucial to sentiment towards the US economy.

“While consumers are likely to remain in a cautious mood, they now appear to be becoming slightly less negative.”

Backstop to Boost Emerging Markets

“A double dip in the US still looks less likely than continued moderate growth," he said. "And we expect emerging economies to continue to outperform the developed world.”

There is also an important backstop. As the last Federal Open Market Committee meeting signalled and Fed Chairman Ben Bernanke’s Jackson Hole speech made clear, the Fed is committed to maintaining the size of its balance sheet and stands ready to step in with additional extraordinary measures if things really do fall apart.

"The Fed’s commitment as well as recent moves from the Bank of Japan reinforces our conclusion that global liquidity will remain flush and policy and market rates could stay very low for a long time to come," he said. "This should prove to be positive for key risk assets. Eventually, this liquidity should seek out yield and return in markets where fundamental anchors remain strong, particularly emerging economies.”