After five turbulent years of decline and unrelenting economic doom there are signs that change could be afoot.
Since 2008 we have experienced falling economic growth, rising unemployment and a credit crunch that has put huge pressure on business and individual savers, and in the process brought down many banks and businesses worldwide.
However positive signs are now emerging. Globally stock markets have shown strong growth, particularly since the start of this year. In the US the S&P 500 is up 15 per cent since January and Japan has grown by 44 per cent. Despite the on-going sovereign debt crisis in the Eurozone, the EURO STOXX 50 has grown by 7.7 per cent.
So dare we dream that this could be the end of the world as we’ve known it since 2008? Is the worse recession for 100 years really over? Can we all now breathe a sigh of relief and get on with our lives?
I think the answer is yes but don’t unfasten your seat-belt just yet.
In my view 2013 will be transformational and we will look back on this year as the point where we finally broke free from five years of recession. But the path back to growth will not be problem free.
The stock market growth seen recently is a good sign, as is the trend to switch investments out of fixed income and into equities. The stock markets aren’t just a money machine; they’re also a crystal ball into the future. Strong market growth reflects confidence in corporate growth and profitability and we’re seeing a significant vote of confidence in the global economy coming from the markets at the moment.
This vote of confidence sees investment into company shares which flows onto the balance sheets of the firms involved. This allows them to invest in R&D, create jobs and engage in merger and acquisition activity, sparking a virtuous economic circle of corporate growth, which drives the share price higher, and attracts fresh investment.
This growing confidence is also fuelled by the actions of Central banks which have injected liquidity into financial systems through quantitative easing and low-interest rates – helping to limit the cost of borrowing for business and individuals and keep economies moving.
And this is perhaps the key to understanding whether we are finally out of the woods and can look forward to a period of growth and rising prosperity.
More than anything, the economic woes since 2008 have illustrated how interdependent companies and countries’ economies are and how ripples in one part of the world can have a devastating impact in another.
To understand the impact this globalized viewpoint will have on the economy we produced the Schroders Global Investment Trends Report, a survey of 14,800 investors around the world. We asked whether investors have confidence in economic recovery and where they see the growth and recovery coming from.
Our report shows a surge in confidence, with 48 per cent more confident about opportunities in 2013 compared to last year. This is more than double (18 per cent) those who are less confident. More than four-fifths (81 per cent) are looking to increase or maintain the amount of money they invest in the coming 12 months.
However the focus for this growth remains in Asia with more than half of the people we polled saying this is where they see the greatest potential for growth and investment opportunity outside their own countries.
This is also where business sees growth and it is no accident that the companies that are performing most strongly during the recent stock market rallies are those with exposure to global markets.
While huge opportunities exist, we also have large global problems which remain to be confronted. Sovereign debt crises have brought a number of European countries to their knees, and the Eurozone debt crisis will continue to be a brake on growth.
Almost half (49 per cent) of the investors we polled saw the Eurozone as the greatest threat to economic recovery, with political instability cited by 42 per cent worldwide as the greatest threat, followed by uncertainty over policy direction for governments.
The credit crunch has led to a blurring of lines between Government and business as economic survival has resulted in massive state bail-outs for banks and other businesses. The journey back to economic normality requires these new links between State and business to be cut, only by doing so do we create genuine free-trade and an economic platform for growth.
This process will be a bumpy ride and the Eurozone crisis will take years to heal. However by taking a global view, investors and business have opportunities in 2013 that will drive growth and recovery. The journey back to normality is well under way.
© Schroders Investment Management