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THE END OF one year is always a time of reflection and to think and plan for what lies ahead in the coming year. Unfortunately, forecasting the shape of the investment landscape next year is a particularly hazardous venture, given that today’s uncertainties are much greater than normal. But we need to at least clarify the issues, sketch out as best we can the main contours of this landscape and work out the implications for us in Southeast Asia.
Global economy: More downward surprises
It is tempting to think of the positives in the global economy and persuade ourselves that the worst that can happen is a moderate slowdown followed by a pick-up in late 2012, as seems to be the consensus. In our view, there may well be a rebound in late 2012, but only because the slide in the early part of the year could be very bad indeed.
We say this because the weaknesses that are appearing simultaneously in different regions will feed off and reinforce each other, so producing a far-more dire scenario than if we assess each individual risk separately. The just-released Organisation for Economic Co-operation and Development lead indicators confirm that the outlook for most major economies is a material slowdown through mid-2012, at least. Add to that the following factors that we will discuss below, and it is clear that things can only get worse:
- Geopolitical risks are worsening, with implications for oil prices and risk appetites;
- The eurozone crisis has not been resolved and will get worse before it gets better. Tensions will build there until there is a crunch that finally forces its political elites to forge policies that resolve the crisis;
- The lead indicators point firmly and unequivocally to a simultaneous slowdown
- in the US and virtually every single other major economy; and
- There are internal stresses within Asian countries that increase their vulnerability to the external shocks that are certain to hit them next year. Asia’s challenges do not only come from a weak global environment.
Geopolitical risks: Watch the Middle East’s impact on oil prices
The rising tensions in the Middle East are not just something interesting to watch on the news. Political turbulence there raises the risk premium in oil prices and can drive up the cost of energy and transportation. We think this risk premium will rise and keep oil prices higher than they should be. There could even be occasional sharp spikes that could be debilitating for a global economy that is already slowing.
Syria and Yemen are on the brink of civil war. While they are not major oil exporters, their travails will probably hurt us all in 2012. Yemen borders key oil producers such as Saudi Arabia and overlooks major transportation routes for oil. Syria lies adjacent to Israel/ Palestine, Iraq and Lebanon — a regime collapse in Syria could destabilise these other hot spots. The situation in Syria looks alarming, with the pace of killings accelerating sharply in the past week.
The key oil producing countries in the Middle East are also more fragile than before. Saudi Arabia, which produces about 12% of world oil, bears watching as it faces neighbouring states that are unstable and internal problems over royal succession. In addition to Yemen, the Saudis also have to worry about Bahrain. Bahrain’s internal divisions between a resentful majority of Shia Muslims and a minority Sunni monarchy are heating up again, with Iran allegedly stoking tensions there. Bahrain lies adjacent to Saudi Arabia’s eastern province where much of its oil is produced — and where a largely Shia population turns restive whenever there are tensions in Bahrain. There are also risks associated with the royal succession. The highly respected 87-year-old King Abdullah, whose astute and moderate policies have kept Saudi Arabia stable, is not in good health. His 86- year-old half brother and the crown prince recently passed away and was replaced by a 78-year-old new crown prince with a reputation as a hardliner.
In short, too many stress points are turning critical at the same time: It is quite clear the risk premium will rise.
Eurozone: Economy in recession, policymakers stumbling their way to resolving crisis
There are some things that are quite clear about the direction the eurozone is set to take in 2012, and they are mostly negative.
The economy is weakening and it is virtually certain that the eurozone will be in recession in 2012. The lead indicators and the massive fiscal consolidation underway point clearly to this, and the recent trend in production and consumer spending validate the conclusion. As the economy worsens, budget deficits will be harder to bring under control, adding to financial market uncertainty.
Moreover, as ordinary voters actually experience job losses and the withdrawal of welfare benefits, a political backlash is inevitable — there will be more street protests and labour unrest. This will make the process of ratifying eurozone agreements to resolve the crisis all the more difficult. French President Nicolas Sarkozy faces a tough re-election battle: His main challenger, Socialist candidate Francois Holland, has made clear that he will seek renegotiation of the eurozone accords if he were elected.
Eurozone leaders are still unable to devise a credible package that comprehensively resolves the key stress points in the eurozone. The summit meeting in early December gave some comfort on longer-term issues such as devising a fiscal compact to ensure that there would be no recurrence of a sovereign debt crisis. But it fell short of giving what is needed to address the current crisis.
The key to a much more positive outlook for Europe is for the European Central Bank to commit to buying unlimited amounts of sovereign bonds. But it is unlikely to do so until the political and economic pressures are intense enough.
