India, China will see 8% growth next year

India, China will see 8% growth next year
The Economic Times, July 2, 2009, Page 10

ROBERT Parker, vice-chairman at Credit Suisse Asset Management, believes growth will accelerate in emerging markets, notably China and India, helping these countries decouple from developed economies. Parker, who has spent 27 years in various positions at Credit Suisse, spoke with ET NOW on a wide range of issues, including sustainability of the nascent recovery in the global economy and the likelihood of asset bubbles fuelled by cheap money.

How convinced are you that the global economy has turned the corner?

I do think that in the developed economies — the US, the UK, Europe and Japan — the very dire recession that we saw in the fourth quarter of last year and in January and February of this year has clearly come to an end. I do think that in the developed economies, we will see stronger economic data in the third quarter of this year. For example, US economic growth could be as high as 2-3%, and I think, we will see positive numbers in Europe and Japan for the second half of 2009. Having said that, some factors could constrain recovery in 2010, and consequently, I think that growth in the US and Europe could struggle to be much above 1% in 2010. Constraining factors are obviously the lower levels of bank leverage — bank lending is recovering very slowly — and also consumers rebuilding their savings and a reduction in consumer borrowing and also the dead weight of unemployment. Unemployment in the US and Europe is probably going to average at 9.5-10%. So, there are factors which are probably going to result in a very mediocre recovery on a two-year time horizon. One positive thing, however, is that you are going to get decoupling between the developed economies and most of the emerging markets. Consequently, next year, I think, we could see Chinese growth reaccelerate towards 8%, likewise in India. Latin American growth will be much higher — probably double the level we’ve seen in the first half of 2009.

Do you believe that coupled with loose monetary policy, the very high correlation in asset prices — commodities and equities in particular — that we’re witnessing now is going to set us up for more asset bubbles and potentially cause a hard-landing in markets?

I think, the Federal Reserve is going to keep the federal funds rate between zero and 25 basis points, probably for the next nine months. In the UK, the Bank of England is going to be stuck with a policy rate of 50 basis points at least for the rest of this year. So, with very low money-market rates, I think, there will be a steady flow of capital out of money-market funds. Investor cash levels are still very high in institutional and retail firms. So, capital will flow into equities and other asset classes. The correlation between commodities and equities, this year, of course, has been perfectly logical. Economic recovery means that the demand-supply balance for commodities has been tightening up, after the very weak demand-supply situation we saw in the second half of 2008 and early 2009, and clearly, an improved growth outlook is positive for equity markets. I think, however, this rally in equity and commodity markets could start to fail towards the end of this year and going into the first half of 2010. If I am right, the developed world only has a growth of around 1% next year. Clearly, the demand for commodities from developed economies is going to ease off at a time when in certain commodity markets — notably oil and other energy sectors — supply is reasonably easy. So, I think, further upside in energy prices is very limited, indeed. In 2010, I don’t think, we are going to have an asset bubble in equities. Obviously, priceearnings ratios are higher today than just three months ago. I think, it’s going to be a year where defensive equities will outperform cyclical equities given my growth outlook.