World Slump Seen Triggered by European Breakdown

International investors are expecting the world economy to relapse into a recession. A majority of these investors are expecting a global meltdown within the next year. Many are saying that this global meltdown will be triggered by a debt collapse in the euro zone.

By Rich Miller
Sep 28, 2011 9:00 PM MT
Bloomberg

International investors expect the world economy to relapse into a recession, with more than one in three forecasting a global economic meltdown within the next year, according to a Bloomberg poll.

About two-thirds of those surveyed say the international economy is deteriorating, up from just 18 percent who felt that way in the last poll, in May. The increased gloom is centered on the 17 countries that share the euro currency: Almost nine in 10 say the euro zone economy is worsening, according to the quarterly Bloomberg Global Poll conducted Sept. 26 of 1,031 investors, analysts and traders who are Bloomberg subscribers.

“Action needs to be taken as soon as possible,” says Jawaid Afsar, a trader at Securequity Ltd. in Sheffield, England, and a poll participant. “Markets will not wait that much longer.” If Europe fails to resolve its debt problem, “this will lead to a recession, which will drag in the U.S.”

A plurality of those polled -- 43 percent -- expects a world economic recession within the next year. More than seven in 10 foresee a global slump within the next five years.

Thirty-seven percent forecast that a debt crisis in the euro zone will lead to a global economic meltdown within the next year. A majority think that will happen sometime in the next five years.

‘Crisis of Competency’

Investors are already responding by husbanding resources. More than two in five say they’re increasing their holdings of cash, the largest proportion that reported doing so since the poll began asking that question in June 2010. A majority -- 56 percent -- believe that U.S. equities have entered a bear market, according to the poll.

They’re even more pessimistic about investment opportunities in Europe. The region comes out worst when those surveyed are asked to pick the markets that would be the least attractive over the next six months: 53 percent cite the area for that distinction. That’s the highest percentage for any place since the question was first asked in October 2009.

Squabbling in the euro zone over sovereign debt and in the U.S. over the federal budget have led to what JPMorgan Chase & Co. (JPM) chief economist Bruce Kasman calls a “crisis of competency” as investors question the ability of authorities to act fast enough to avoid repeat recessions.

“This political gridlock on both sides of the Atlantic unfortunately ripples out into the global economy,” says Scott Troxel, head of the Scandinavian desk for Tradition Group in Lausanne, Switzerland, and a poll respondent. The volatility in financial markets “is a very telling tale of the ubiquitous panic and uncertainty.”

Equities Slump

The MSCI World (MXWO) Index of stocks in developed nations has swung widely over the last month, falling from 1,203 at the start of September to a low of 1,089 on Sept. 22 before settling yesterday at 1,122, down 12.3 percent on the year.

Equities have slumped as economic growth worldwide has slowed. Retail sales in the U.S. stagnated in August while a gauge of euro-area manufacturing last month fell to its lowest level in two years.

The world economy grew 5.1 percent last year after shrinking 0.7 percent in 2009, according to the International Monetary Fund in Washington. Global growth of 3 percent or below qualifies as a recession by IMF economists’ reckoning because outright contractions of world economic activity are rare.

Danger From Derivatives

The more than $600 trillion in over-the-counter derivatives outstanding increases the dangers of a meltdown, says Michael McDougall, senior vice president at Newedge USA LLC in New York.

“That is a big time bomb,” says McDougall, who took part in the survey.

While stocks are still seen as the best asset over the next year, growing numbers of investors expect equities to fall further in the interim. A majority say the Euro Stoxx 50 Index will be lower six months from now, compared with one-third who felt that way in May. The index closed at 2,176.64 yesterday.

About two in five forecast a fall in the Standard & Poor’s 500 Index over the next half-year. That’s up from about one in four who said that in May and is roughly in line with those now expecting a rise. The index closed at 1,151.06 yesterday, down 2.1 percent.

The caution has spread to Asian stock markets. Three in 10 see the MSCI Asian Pacific Index falling over the next six months; fewer than one in five said that in May. Just over 40 percent forecast a rise in the index, which closed yesterday at 113.84.

‘Messy Ending’

Asian investors, usually the most optimistic in past polls, have turned more cautious. Almost half see a global economic meltdown in the next year, compared with one-third of European and U.S. investors who believe that.

Fifty-five percent of respondents from Asia are raising the amount of cash in their portfolios.

Mark Burges Watson, chief operating officer for Japaninvest Group in Tokyo, is one of them. He’s putting dollars in his own account and is buying gold on price dips “in anticipation of a possible messy ending in the euro zone -- sooner or later.

‘‘My problem is that any short-term fix in the euro zone will not address the basic incompatibilities which have been there since the beginning,’’ he says.

Other respondents aren’t as enthusiastic about gold. More than two in five expect prices of the precious metal to decline over the next six months, while one in three say they’re reducing their exposure to it. Gold futures for December delivery fell $34.40, or 2.1 percent, to settle at $1,618.10 an ounce at 1:43 p.m. yesterday on the Comex in New York.

Buy Bonds

Given the uncertainties, investors are beginning to look more favorably toward buying bonds. While 27 percent of those surveyed say bonds will offer the worst return over the next year, that’s down from 35 percent in May and the lowest since the poll began. The percentage of investors who say bonds will offer the highest return more than doubled, to 15 percent.

Ambivalence stretches to the U.S. as well. Thirty percent of investors tapped it as among the markets that will have the best returns over the next year -- the highest of any country in the poll. One in five took the opposite view, singling out the world’s biggest economy as among the markets that will offer the worst investment opportunities.

The dollar will remain the pre-eminent currency for some time, according to the poll. Fewer than one in 10 of those surveyed expect a move away from the use of the dollar as a reserve currency within the next year. Thirty-eight percent expect that to happen within the next two to five years.

Almost one in three investors are adding dollars to their portfolio while fewer than one in five are reducing their holdings of the U.S. currency, the poll found.

Arab Spring Doubts

Investors also have their doubts about the Middle East. Survey respondents aren’t worried about a major conflict anytime soon, with only 3 percent expecting a large-scale war involving Israel to break out in the region in the next year.

Still, they are split about whether the Arab Spring will lead to a more democratic region. Forty eight percent of those surveyed say they expect many of the countries involved in the uprisings to be under some form of authoritarian rule in the next five years, while 40 percent say most will be democratic.

The quarterly Bloomberg Global Poll was conducted by Selzer & Co., a Des Moines, Iowa-based firm. It has a margin of error of plus or minus 3.1 percentage points.

To contact the reporter on this story: Rich Miller in Washington at rmiller28@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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