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IABFM Articles > > Economics > Outlook 2011: We are in the third super-cycle


Outlook 2011: We are in the third super-cycle


By Michael Preiss

11 January, 2011

As we approach 2011, the global macroeconomic enviornment has stabilised. While the biggest immediate worry in the West is a double-dip, we do not think it will happen. Meanwhile, the balance of economic and financial power continues to shift towards the East.

But risks abound, including geopolitical tensions on the Korean peninsula and in the South China Sea, over-regulation, another bank and government debt crisis in the West, inflation bubbles across Asia, and trade protectionism.

Although it is vital not to under-estinate the risks, it is equally important to recongise the upside potential. That means it is paramount for inverstors to combine local knowledge with global perspective.

2011 will be characterised by an uneven recovery in the world economy, leading different authorities to adopt diverging policies. This may raise conflicts and uncertainties, but also bring opportunities.

In the words of our Chief Economist and Group Head of Global Research, Dr Gerard Lyons, it is the proverbial 'tale of two worlds'.

Financial markets increasingly are focusing on the story of a rich world struggling with a weak and jobless recovery and an emerging world, including the rising economic giants China and India, challenged by inflationary pressures and negative real interest rates.

We at Standard Chartered Global Research expect interest rates in the West to stay close to record lows in 2011 but in the East there is pressure on interest rates to rise.

Tale of two worlds

In 2011, West will struggle with debt, deflation and deleveraging. The US is past the worst, but it faces a below-trend recovery bordering on stagnation. Europe, especially the periphery, is the big problem area. Europe is divided between the solid center of its euro zone and a weak PIIGS (Portugal, Ireland, Italy, Greece and Spain) periphery. The euro is likely to collapse at some stage if the euro area fails to become a political union.

Australia is also a prime example of a two-speed economy. Resource rich Western Australia outperforming the older, more populous states, New South Wales and Victoria.

In 2011, Australia's march towards a two-speed economy will only gain momentum as the lucky country starts confronting how to manage the two-speed economy. While our house view remains overall positive on commodities we have turned bearish on the Australian dollar. Standard Chartered Global Research forecast for the A$ year-end 2011 is 0.98.

2010 has been a challenging year for global financial markets with post subprime challenges, a


European sovereign debt crisis and recently renewed tension on the Korean Peninsula.

It was a year when many economists and market commentators spoke about the possibility of a 'double-dip', the fear that the global economy could fall back into recession and deflationary pressures.

The world economy has moved into a recovery phase, albeit that the growth momentum is weaker than in past recoveries, especially in the advanced economies. By contrast, growth momentum is strong in the emerging markets.

Before the financial crisis , many economies around the world were booming in unison. After the subpirme collapse and credit crunch, the differences between developed markets and the emerging countries look stark, and in 2011 they will increasingly become more obvious.

While the situation in the US is expected to improve, the uncertainty in the peripheral euro area economies in again heightened, and is reflected in Standard Chartered Global Research's revised forecast for the euro at 1.20. Euro area negative most probably will be a major focus for FX markets in 2011.

World in a super-cycle

Despite the current economic challenges it is important to recognise that the world is in the middle of a super-cycle.

This is a period of historically high global growth, lasting a generation or more. There are several fundamental factors driving this, including rising trade, high rates of investment, rapid urbanisation and the technological innovation. Super-cycle are also characterised by the emergence of economies enjoying rapid growth, such as China, India, Indonesia, the Middle East and several African economies now.

The world economy has twice enjoyed super-cycles before. The first, form 1870 to 1913, saw a significant pick-up in global growth, with the world growing on average each year by 2.7%, a full 1% higher than previously seen. That cycle was led by the emergence of the US and saw increased trade and greater use of technologies from the industrial revolution. The second super-cycle, from 1945 to the early 1970s, saw growth averaging 5% and was characterised by the post-War reconstruction ans catch up across large parts of the globe. It saw the emergence both of a large middle class in the west and of exporting nations across Asia, led by Japan.

For many investors the thought of a super-cycle may sound strange, given the present problems confronting the world economy.

Yet the reality is the world economy is now over US$62 trillion, about twice the size it was a decade ago, and it has already exceeded its pre-recession peak. Over that last two years, the economic rebound has been driven by quantitative easing in the west and by stronger growth in the emerging markets. Indeed emerging economies, which are one-third of the world economy, currently account for two-third of its growth. This trend looks set to continue.

Within standard Chartered we like to refer to this as 'the arc of growth', bridging Africa, the Middle East and Asia.

China and India

By 2030, the world economy could grow to US$308 trillion. Excluding Inflation that would equate to US$129 trillion in ral terms, or in today's prices, and to US$143 trillion, keeping prices constant, but allowing for some emerging market currency appreciation.

The balance of the world economy will reverse, with the combined share of the US, the EU and Japan shrinking from 72% in 2000 to 29% in 2030.

China will provide 20% of global growth in the next 20 years, the largest chunk, and it will be the world's largest economy by 2020. By 2030, China will be nearly twice the size of the US, but its income per head will still only be half of the US, leaving room for further catch-up. China will also drive growth in Africa and Latin America as it seeks commodities.

India will become the fastest growing major economy in the next 20 years, with growth rates overtaking China by 2012. Not even in the top 10 in 2000, India will overtake Japan as the world's third-largest economy by 2030. India will have the single largest tertiary-educated population by 2030. These factors underpin our structural bullish view on the Indian rupee and Indian assets.

The growing emerging markets middle class will help fuel commodity price, with energy and food continuing to become more expensive. As purchasing power increases across the emerging world, trade amongst Asian economies and Asia's trade with the Middle East, Africa and Latin America will increasingly dominate world trade, overtaking trade with the developed world. These 'South-South' trade corridors will account for over a third of global trade within the next 20 years. The Middle East will outstrip the US as Asia's leading trading partner, while China will see Africa as a more important trading partner than Europe within the next two decades.

Mongolia and Sri Lanka were the star performers in global equities in 2010, rising about +156% and 110% respectively. According to our super-cycle

forecasts, the Mongolian economy in 2013 could grow by over +28% GDP from +8% this year as its vast copper and coal resources and (possibly) gold are tapped.

Sri Lanka after a long civil war is now reaching its full potential and the stock market rally, making Sri Lankan stocks the second-best performers in the world, is a sign of the potential unleashed.

Indonesia is another economy that has surprised many inverstors. JCI (Jakarta Composite Index) rose +51% in 2010 making it the world's fourth-best performing equity market. In the super-cycle we expect that Indonesia will continue to be a star performer. The 28th largest economy in 2000, Indonesia may be the world's 10th largest in 2020 and fifth-largest in 2030.

The 7% Club

For 2011, we expect positive surprises to emerge from Africa. Many of the promising countries that we refer to as the '7% Club' are in Africa. The '7% Club' are countries that expected to achieve +7% growth on average for several years. The reason why this matters is that growth doubles in a decade.

The biggest concentration of overlooked markets that could grow over 7% is in Africa.

Ghana, according to our Standard Chartered Global Research forecasts, could become one of the fastest growing economies in the world in 2011, as oil comes on stream in significant quantities. Ghana's economy, one of the better managed in Africa, has proved to be 75% larger than previously thought.

One a medium-term perspective, we are very optimistic as we state in 'The Super-cycle Report'. In the report, we focus on some of the key drivers that already impacting the world economy.

There are, of course, risks to this outlook. Avoiding a hard landing in China is crucial. Avoiding deflation in the US is another necessity. The greatest risk is protectionism. Protectionism and different combinations of fiscal austerity and monetary polices could bring turbulence to currency markets. Escalation of currency intervention in the developed markets as well as the emerging world could be a potential policy mistake.

How long the current deflationary environment persists, and how well the exit from quantitative easing is implemented will determine the relative performance of the three principal asset classes: fixed income, precious metals and equities. Longer-term we expect that large-cap equities with significant sales to emerging markets will be the preferred asset class.

Which are the markets and countries that are likely to benefit the most? The countries that will succeed are those with the cash, the commodities and the creativity. In recent years, we at Standard Chartered Global Research have described what was happening as the New World Order; reflecting a shift in the balance of economic and financial power from the West to the East. While still valid, a super-cycle better reflects what is happening in asset markets and the economy globally. It is still possible for the West, including the American and European companies, to do well in the environment, particularly if they are creative. Yet it is the emerging and frontier markets that appear to be the clear winners.

We believe the world economy is on an upward path, which is albeit no always a straight line. In the final analysis and in the words of a Chines proverb: 'Fortune favours the brave and the prepare mind'. Welcome to the 3rd super-cycle.

This document is for general information only and does not constitute an offer, recommendation, solicitation to buy or sell any products or services such as securities, regulated investment agreement or collective investment scheme, amongst others. Standard Chartered Bank (SCB) will not accept any responsibility or liability of any kind, with respect to the accuracy or completeness of the information in this document. This document has not been prepared to be suitable for any particular person or class of persons. Banking activities may be carried out internationally by different SCB legal entities and affiliates according to local regulatory requirements. Not all products and services are provided by all SCB branches, subsidiaries and affiliates. Standard Chartered Bank in incorporated in England and Wales with limited liability by Royal Charter 1853, Reference number ZC 19. The Principal Officer of the Company is situated in England at I Aldemanbury Square London EC2V 7SB. Standard Chartered Bank is authorised and regulated by the Financial Services Authority under FSA register number 114276.

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