Stuck in a Turnaround

Remember this scene in Austin Powers when the world’s wittiest spy couldn’t manage to get his cart turned around without getting stuck?

It seems today’s world leaders and central bankers are having the same problem. Despite their best efforts, the global economy is caught between recession and recovery, and it’s not clear which direction will prevail.

Pessimists can point to last week’s poor employment report, continued weakness in housing—in the U.S., China and elsewhere—and a slowdown in global manufacturing as indications things will get worse before they get better.

Optimists take heart in the International Monetary Fund’s (IMF) new forecast that the global economy will grow 4.6 percent this year and 4.3 percent in 2011. The 2010 forecast reflects stronger-than-expected growth in Asia. China is expected to lead the way with 10.5 percent growth this year and 9.6 percent next. The other BRIC nations (India, Russia and Brazil) are also expected see growth between 4 percent to 9 percent.

What about the EU’s debt problems spreading to the rest of the world? The IMF played down the idea of contagion—“contagion to other regions is assumed to be limited and the disruption in capital flows to emerging and developing economies to be temporary.”
But it says high public debt levels, unemployment and constrained bank lending amplify any downside risks.

Sovereign debt and slow growth isn’t a big issue in emerging nations. For that and other reasons, we think the BRIC nations and other key markets like Turkey, Indonesia and even Chile and Colombia (Latin America’s best-performing market year-to-date) will continue to provide good opportunities for active managers.