After massive interest rate cuts, central banks worldwide including the US Federal Reserve and Taiwan’s central bank will maintain a loose monetary policy before the year’s end, Arjuna Mahendran, Hong Kong-based managing director and head of investment strategy for Asia at HSBC Private Bank, said yesterday.
“They will adopt a wait-and-see policy [as global economic fundamentals remain volatile],” he told an outlook briefing in Taipei.
The bank forecast a contraction of 1.9 percent for the global economy this year and 1.6 percent growth for next year.
Although the recession may be over or nearing an end, global equity markets including Taiwan’s main bourse will remain volatile in the next three months as uncertainties creep in, Mahendran said.
However, he expressed a positive view on global markets in a year’s time, saying financial markets around the world would be in a better position than now.
“Our recommendation is to trade the markets over the next three months and, once you see a big dip in stock or commodities markets, wait for the dip and buy for the longer term,” Mahendran said at his presentation, entitled “We should hasten slowly.”
The near-zero funding cost, strong money supply and low inflation and asset prices provide incentives for investors to look for investment opportunities, he said, adding that demand from both developed and developing countries is growing.
However, the question of when and whether US consumption, which Mahendran described as the only engine of the anticipated global economic recovery, will turn around was uncertain, along with rising unemployment, declining property prices and slow credit re-leveraging in the US.
The economist, however, argued that the US’ saving rate would stay at its current 5 percent level, up from almost zero percent in 2005, since the US stock market had bottomed out after March 9.
It was still unclear whether US consumption would turn around since property prices are expected to see “another 10 percent decline,” he said.
While new home sales have picked up in the past two months, the bank believed that the US housing market is likely to bottom out in six months.
When both share and property prices begin to rise, US consumers will start buying, said Mahendran, who is pessimistic that China will be able to ramp up its spending to make up for the loss of demand from the US over the next 10 years.
Mahendran said he was in favor of cash and US bonds over equities, commodities or Asian bonds in the next three months.
He disagreed with views that the US dollar would eventually collapse because of over-borrowing by the US government.
However, Mahendran agreed that the US dollar would further weaken to trade at between US$1.35 and US$1.45 to the euro by the end of this year, and favored Asian currencies such as the South Korean won and the Singapore dollar.
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