Financial markets braced for years of sovereign debt crisis tremors

Market tremors from the developed world’s sovereign debt crisis will continue to reverberate for years to come, prompting investors to allocate funds to Asia in a bid to navigate the storm, analysts said in Manila yesterday.

The potential headwinds on the global investment horizon include oil price shocks, food price inflation, China hard landing risks, the eurozone volatility and a US fiscal crisis, panellists at a seminar held at the ADB annual meeting said.

“Volatility is something we have to live with,” said Desmond MacIntyre, chief executive officer of Standish, an investment management firm.

“Can Europe pull itself together? Will there be an oil shock? Will there be a US fiscal crisis? We can’t rule out with certainty any of these threats. In particular, investors are concerned over the prospect of a US fiscal crisis in an election period.”

The eurozone crisis was a greater risk for Asia than inflation, MacIntyre added. The expansion of the European Central Bank’s balance sheet has not “solved the sovereign crisis in Europe,” he added.

However he said that while there was a “large amount of disagreement” in Washington, some fiscal compromise will be arranged “albeit in the eleventh hour”. But fiscal tightening will be negative for US growth in the coming years, he said.

In an interview with Emerging Markets earlier this week, Stephen Roach, non-executive chairman of Morgan Stanley Asia, dismissed the prospect that US fiscal contraction could endanger global growth. “We won’t slash spending - we have invented the concept of kicking the can down the road.

“If you think the US will embrace austerity, you are living in cuckoo land. Put simply, we are the world’s currency issuer, we can get away with it [fiscal indiscipline] for now.”

US monetary policy expansion has created asset bubbles and the US Federal Reserve should signal its ambition to tighten policy after 2014, Roach said. “The Fed needs to frame its tightening framework.”

Asian markets remain strongly correlated with developed markets despite the region’s strong macro-economic performance but pent-up demand suggests Asia will outperform in the medium-term, analysts said.

The global shift in economic power in Asia’s favour will trigger international fixed income portfolio managers to establish a local presence in Asia to service corporate and retail demand for financial products, Stuart Leckie, chairman of Stirling Finance, a pensions advisory firm, said. “Nowhere in the world boasts a demographic picture that is more promising than in China.”

Renato de Guzman, chief executive officer at the Bank of Singapore, pointed out that an expanding domestic investor base would deepen local capital markets in the region. “Asian banks are the strongest and safest in the world. And the private banking industry has grown 89% from 2006 to-date to be worth over $1 trillion, for example.”

Global bond funds now boast a more diversified currency mix, as the renminbi’s impact on global exchange rates has jumped over the past few years, MacIntyre said.