“The underlying problems have not disappeared, ie the transfer of the private sector liabilities onto the government balance sheet, in terms of explicit and implicit guarantees for the banks,” says David Byrne, head of fixed income at Swisscanto in London.
There will be a glut of peripheral European Sovereign issuance from September onwards, claims Byrne, and Swisscanto expects a pick-up in spread volatility. Furthermore, the fiscal tightening that would be required to bring a number of the major European sovereign issuers back into line in terms of debt/GDP is unlikely to happen because fierce opposition from European public sector workforces would render such tightening political suicide for incumbent governments.
Then there’s the risk of a double-dip recession in the US. Though many commentators consider this unlikely, weak domestic demand in the US and a surge in imports in the second quarter have done nothing to allay concerns. At the same time, in the wake of China overtaking Japan as the world’s second largest economy, volatility in the Chinese currency, the Renminbi, could “set the stage for fresh battles” between China and the world’s largest economy, according to Anthony Chan, Asian sovereign strategist at AllianceBernstein.
“The large expectation gap between China and the US on the currency issue [in terms of how the RMB should appreciate] will continue, once again sparking fears of trade friction if not trade war between the countries,” says Chan.
A trade war. Plenty to fret about, then, in the dark winter nights ahead.
But if you’re looking from some sunshine after the rain, take a look at Egypt, and more specifically GB Auto, which, according to the frontier-market bulls at Silk Invest, saw its second quarter’s net profit grow by a 93% year-on-year to EGP 78m. The firm also provides a classic example of frontier-market companies getting on with it away from the debt-sodden developed markets. GB Auto is now planning to export its success formula to other African markets, where it is looking for potential acquisitions, and is currently in advanced negotiations with Tata Motors of India.
©2010 funds europe