Sital Ruparelia

I’m often asked for my view on the economy - and in particular how long it will be before the economy and the job market turn around once again. Whilst I have a view, I’m not really an economist. But fortunately I know a man who is; Mitul Kotecha.
 
Having worked as a strategist/economist for over 15-years in several corporate and investment banks in London, Mitul is now Managing Director and Global Head of FX Strategy for a large European investment bank based in Hong Kong. He is frequently sought out by the press/media for he’s opinions and is a regular guest commentator on Bloomberg and CNBC news channels. And for this week only, he’s our guest commentator.
 
In the article below, Mitul shares he’s views on the global economy, the financial markets and prospects for the job market. As you’ll see from the title, he feels there may finally be some light at the end of the dark economic tunnel…

Light At The End Of The Tunnel

Guest article from Mitul Kotecha There has been so much doom and gloom over recent months that it is easy to think that things will stay this way.  We are not in a typical crisis if there is such a thing, but hopefully I can provide you with an inclination that there is light at the end of the tunnel even if there is no easy path to finding it. 
 
Many of us have been shocked at the breadth and depth of the financial crisis, even those such as I who have been in the markets for many years analyzing, writing and viewing developments, surrounded by screens full of information.  The truth is that even the experts underestimated this crisis and its impact on the world’s economies and markets.    
 
Having followed the evolution of the financial and economic crisis both from London and now from Hong Kong it has become increasingly clear that economic conditions and banking sector health are not going to improve quickly around the world.   This crisis is fast turning into the worst since the Great Depression of the 1930s. 
 
Our definition of ‘normal’ will change as a result and the financial market landscape is likely to look very different over the coming years.  This all sounds very gloomy and it is not my intention to focus solely on the bad news.  Believe it or not there is a sprinkling of good news amidst the gloom but I do want to make sure that the reality of the situation is clearly understood. 

On a more positive note, the authorities globally have been very aggressive in terms of stimulating economic recovery and attempting to return banks to health.   Interest rates have been cut dramatically across the world, meaning that mortgages and the costs of many other loans have declined, whilst government stimulus and tax cuts have led to more cash in the hands of the consumer.  What the crisis has done is to remove many of the excesses of recent years and brought back a dose of reality. 
 
This is no bad thing and once recovery does take place it will be all the more sustainable because of it.  You may wonder why it is so important to see banks returning to some form of stability given that they can arguably be blamed for getting us and themselves into this mess in the first place.   However, the reality is that without healthy banks, lending cannot pick up, and the economy cannot grow.  
 
Already it appears that the slide in economic conditions globally is slowing down and the pace of decline is not as rapid as it was at the tail end of 2008.  I am not saying that economic conditions are getting better as real recovery is still a distant prospect but I do believe that the tide of bad news is beginning to ebb.  Some economic indicators have actually stabilized and even turned around, albeit from very weak levels. This year, growth globally will shrink, led by developed economies, but next year there will actually be some, albeit tepid recovery in global growth.
 
Unfortunately labour markets globally will deteriorate for some time as companies shed jobs given the lagging nature of unemployment.  This will be unavoidable but it could be a lot worse if government stimulus plans were not enacted.  
 
The measures undertaken by governments and central banks globally, less negative economic data and improving risk appetite have so far boosted investor confidence and helped to fuel equity rallies of up to 20% in some markets.   Although this could be a false start, historically equity markets have been strong leading indicators of economic recovery.  
 
In the past, equity markets have began to rally around 5-6 months ahead of the turn in the economy.   If the rally in equities persists it will send a positive message about economic recovery in the months ahead.    
 
There will be more pain but also opportunities even in the jobs market.  Increasing government intervention or outright nationalization of banks as well as the realization that many of the financial products that banks dealt with no longer exist, mean that the ways of doing business are clearly changing.  Banks are clearly in rationalization mode, laying off staff and freezing hiring plans and this will undoubtedly continue for some time.  
 
Nonetheless, restructuring in the way that banks do business will also result in opportunities.  Riskier types of business are giving way to more traditional forms of banking. The rapid pace of layoffs taking place at the moment suggests that banks will be much leaner but once economic conditions improve they and other related financial firms may also be quick to hire. 
 
Where will the opportunities be?  Those countries that have adopted the most aggressive policies will likely be the quickest to recovery.  Although the US was first into the crisis it could also be first out given the aggressive measures carried out by the US authorities. The UK economy has also been badly beaten especially given the reliance on London and the financial services industry.  
 
However, the Bank of England has been quick to slash interest rates and clean up banks’ balance sheets, whilst the government has been similarly aggressive in stimulating the economy.  Moreover, the pound has weakened sharply against many currencies, which will act as a further stimulus to the economy.  Europe may be slower to recover as the measures to combat the crisis have been less significant.  
 
Elsewhere the prognosis depends on what happens in the US.  Asia remains tied to US demand and a speedier recovery in the US economy will benefit Asia.  In fact, Asia is well placed to benefit from a recovery in developed economies and will also benefit from relatively firm growth in China and India. 
 
As a result, opportunities both for investment and in the jobs market will increasingly open up.  Although it may be difficult to see it now there is light at the end of the tunnel and positioning yourself ahead of recovery will be crucial to ensure that you can grasp the opportunities that will likely emerge once you find the light.
 
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Mitul Kotecha is Managing Director and Global Head of FX Strategy for a large European Investment Bank. You can follow Mitul’s views on the economy and financial markets at he’s personal blog, ‘The Econometer‘ by clicking here