Deflation Pressures Rising; Beware of 'Ugly Sisters': Pro
Despite concerns about global inflation, Victor Shvets, managing director and head of research and strategy at Samsung Securities Asia, says deflationary pressures are on the rise due to the deleveraging of the private sector.
The brokerage is forecasting a 45 percent chance of liquidity injection by governments in the current year ending June 30, 2012, with a 5 percent chance of a double dip.
“I know everybody's preoccupied with CPI and acceleration of inflation, but it’s really in many ways is an afterglow what happened over the last six months,” Shvets told CNBC, referring to the Federal Reserve’s second round of quantitative easing which saw the central bank buy up to $600 billion worth of Treasurys. The program ended in June.
Inflation is likely to fall in the next three months without monetary stimulus on the cards, according to Shvets. And growing Euro zone problems, along with a stalling U.S. economic recovery will continue to cause setbacks.
“Essentially our view is that private sector globally is deleveraging, will continue to deleverage, and if public sector does not step in through fiscal and monetary policy, deflationary pressures will continue to increase,” he added.
The biggest risks to the global economy are the U.S. and Europe, which Shvets has described as the “ugly sisters.”
“There's major problems in Italy, in Spain; if that's not contained, we could then start looking at Belgium and quite a number of Euro zone countries,” Shvets said.
“In the U.S. on the other hand, people are far too complacent. The way the U.S. economy is growing right now, you just wouldn't be able to reduce the unemployment rate or reduce debt to GDP ratios.”
In the current environment where prices are expected to fall, Shvets advises investing in bonds versus equities and commodities.