Global Investment Outlook - 2011 Part I

By M. Isi Eromosele

The continuing European debt crisis has demonstrated that a loss of confidence in the global bond market can be difficult. As the global economic recovery continues to gather speed, it is sure to relieve cyclical budget stress, which would in turn lessen investor concerns, giving developed economies a period of time to solve their structural budget deficits. All indications point to a better global economic expansion in 2011, suitable for expansive investments.

In 2011, it will be prudent to practice a tactical asset allocation policy that prefers stocks over bonds and cash. This is recommended because we at Oseme Finance believe that a mixture of natural global growth, conservative monetary policy and a better global political environment will encourage a certain level of risk taking in global investing. Within the context of this risk taking, there needs to be a focus on the management of downside risks while partaking in the global markets’ positive potential.

Growth Outlook

The global economy slid into 2011 with passable forward impetus, as Europe struggles with sovereign debt problems and the United States faces continued high rate of unemployment. The Federal Reserve decision to purchase billions of dollars in bonds from primary dealers has had the effect of reducing the supply of bonds while conversely increasing bank reserves.

Even though excess bank reserves are currently high, this has not resulted in increased level in lending, as would be expected to happen, even as equity prices has risen. A combination of the wealth engendered by the rise in the global stock markets and the expected inevitable rise in bank lending will be factors in a continued global economic expansion.

Global corporations are returning to high profit margins and have commenced reinvesting in their companies. As confidence has risen among them, the U.S. consumers have returned to spending in the wake of the rise in the stock market and reduction in corporate layoffs.

With the strong German economy as the propelling engine, European growth is rising again, with strong exports to emerging economies. With the U.S. economic growth, which had been tepid, finally gaining speed and as the economies of emerging markets continue to propel forward, we expect global growth to surge during 2011.

Global Inflation

The developed economies in the United States and Europe are saddled with surplus production capacity and not much pricing power while the emerging markets, whose economies are rising fast, are experiencing reduced spare capability and shortage of specialized labor. With an inflation rate of about 1.2 percent in November 2010, the United States inflation rate is at historically low level. Conversely, emerging economies in China and Brazil face an inflation rate of about 5 percent and India’s is at 10 percent. The Central Banks in China and India have been forced to tighten monetary policy to counter inflation concerns in their respective economies.

Inflation in the United States is heavily weighted toward the housing markets at 40 percent of CPI. While the U.S. is saddled with excess housing inventory, this should not put pressure on its consumer prices. The labor markets in the U.S. will remain stabilized as the moderate growth rate of the economy gradually reduces the high unemployment rate through the year. With tight labor markets and little surplus production capacity, the emerging markets face a more demanding inflation picture. These emerging markets could experience high inflation pressures from food prices with China experiencing food price inflation of as much as 10 percent. See Part II of Article.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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