RSS FeedBy M. Isi Eromosele
The last decade has ushered in a fundamental shift in the global economy. Globalization has resulted in the integration of fast-growing emerging nations, i.e. China and Brazil into the world trading economy and capital market structures. As such, these emerging economies has captured an increasing market share of consolidated exports as well as capital inflows, precipitating a continuing gradual transfer of real economic wealth from the developed to emerging economies of the world.
Earlier in the past decade, cheap credit created a bubble debt. There was a sharp increase in consumer spending, caution was thrown to the wind in mortgage lending and leveraged buyouts boomed, especially in the United States. The structural dynamics of the global economy was further undermined by a failure of regulations to keep in stride with the pace of changes going on within world financial system.
Given the continued frailty of the global financial system (the growing debt crisis in Europe) and its spreading impact on the real economy in the United States as well as other parts of the world, there are enduring structural risks for many major world assets. Additionally, there is still great risk for further bank credit losses, tightening credit conditions and uncertain deleveraging of the balance sheets of global financial institutions.
Global financial markets have experienced severe stress and eminent levels of instability. This instability will continue, albeit at a lower level due to the ongoing global economic uncertainty and continued problems in the global financial system. Additionally, the formal rules of the global capital markets system have been upended, with government intervention and political involvement in economic management prevalent in many developed nations of the world. This has had undue influence on outcomes of various global investments, making for unfavorable risk/reward tradeoffs.
However, market participants have continued to reduce leverage to conserve capital and reduce balance sheet usage. This is creating different market prices for cash and artificial economic exposure as for example, cash investment grade bonds versus credit default swaps. This means that in the bond markets, there is a high yield premium for buying physical exposures, whether corporate bonds or government debt. This liquidity premium is typically elevated in uncertain times, but is especially high at the present time, given global economic uncertainties.
The New Financial Environment
The structure of global finance has been irreversibly altered since 2008, especially where investment banks are concerned. The process of credit deleveraging has had profound implications for the global economy; capital markets operations, global financial regulations as well as global investment.
The United States continue to suffer from a severe case of balance of payments problem as well as excessive consumer debt. The disruption in the financial markets is brutal and insecurity is high over how well the world economy will continue to manage its recovery. Recent market events are the result of global structural debt problems and cannot be swiftly repaired.
There is a high premium to be paid in uncertain times and this is especially true at the present time, as market participants are forced to deal with assets that are difficult to price and difficult to sell. Recent events in the world economies and financial markets are direct results in the unwinding of structural imbalances. Government actions have been significant, but the end results of these actions are uncertain.
Investors need to consider how they will deal with the possibility of unplanned outcomes at a time of elevated uncertainty. However, it should be said that the current dislocation in the global markets provide some attractive opportunities for investors with capital and long-term horizons.
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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