Burkhard Varnholt, Chief Investment Officer, Bank Sarasin & Co
Different images of dragons shape Eastern and Western mythology: the connotation is one of strength and confidence in the East, but threat and chaos in the West. The relentless pace of growth in Asia and the debt crisis in the West are actually two sides of the evolution of a new world order. Addressing this dichotomy in the latest edition of "Perspectives", Burkhard P. Varnholt, Chief Investment Officer at Bank Sarasin & Co. Ltd, examines the most important triggers for the global economy and the investment climate in the years ahead. Inspired by the prospects in Asia, he arrives at an optimistic conclusion. He advises investors to view current risk aversion as a countercyclical opportunity, and to invest in a portfolio of global equities selected according to sustainable criteria.
Thanks to their enormous growth in productivity and economic output, emerging-market countries have developed into the most important motors and stabilisers for the world economy. The growth of China is a prime example. Since the 1990s, China's average per capita income has increased 13-fold. At the same time, more than half a billion jobs have been created. Not only has China developed into the absolute world market leader in numerous production and raw-material sectors, the country has also advanced to become the world's biggest exporter of capital in absolute terms.
China's awakening consumers as a motor of future growth
Over the next few years, the key to a major transformation of China's economy and its role on the world stage lies in the growth of domestic consumption. China’s economic model, which originally was focused entirely on exports, has now reached its limits. China's12th Five-Year Plan (2011 to 2016) explicitly calls for sweeping transformation of the present Chinese model and makes direct reference to innovation rather than mere manufacturing, as well as promotion of sustainable infrastructure and systematic promotion of domestic consumption. Given this backdrop, Burkhard Varnholt reckons that China's medium-term economic and stock market prospects are much stronger than people in the West realise. Such prospects present enormous opportunities for investors because assets in China are inexpensive today compared to those in other emerging economies. Due to China's relatively poor market performance in recent years, they are undervalued.
Burkhard P. Varnholt, Chief Investment Officer, Bank Sarasin & Co. Ltd: "In spite of the many risks that abound, I arrive at a rather optimistic, Asian-inspired overall view for a number of reasons. First, the debt crisis and the Eastern world's growth momentum form two sides of an indivisible economic dynamic. Second, the unprecedented financial intertwinement of the East and the West creates a community of joint destiny that makes a gentle rectification of the deficit crisis plausible. Third, reintroducing automatic spending brakes seems more politically achievable in many places today than has been the case for years. Finally, I see China's great transformation providing key stimulus not just for the world economy, but also for China's stock markets."
Western deficits require a change of course
Dangerously growing debt spirals are forcing the West to change course if it is to avoid the chaos of international economic conflicts and trade wars. Viewed historically, the prospects do not look particularly good at first glance: none of the previous debt cycles comparable to the current one had a good outcome. Government bankruptcies, hyperinflation or years of financial repression were the consequences each time in differing variations.
Even so, Burkhard Varnholt does see some bright spots. Given the Eurozone crisis, there is a real possibility that the recently agreed fiscal package, with its strict spending limits, will be ratified and effectively implemented. Recent election results in individual Eurozone countries do not essentially change this. In the USA as well, it is conceivable that the public spending brake mechanism that was very effective up to 2001 will be reinstated.
The global current and capital account imbalances among the 20 leading industrialised nations and China, Brazil and Russia have resulted in increasing mutual economic dependency among borrowers and creditors. This creates an inevitable community of shared destinies and interest between the overleveraged Western hemisphere and the emerging economies of the Eastern hemisphere, and ultimately creates more opportunities than new risks for the world economy.
At the moment, the most important policy contribution to a soft landing for the global economy, according to Burkhard Varnholt, would be introducing automatic spending brake mechanisms. The second most important contribution would be to make labour, capital and product markets more flexible. Continuing economic growth in the emerging-market countries – and especially their awakening consumers – will continue to provide support. Last but not least, the remarkably innovative monetary policies in Europe and the USA provide unprecedented support. If these factors come together, Burkhard Varnholt believes that the Year of the Dragon could mark a sustainable turnaround toward better times ahead for Europe and the USA as well.