There are signs that investors around the globe are likely to be pushed into an intense cautionary mode by the bomb blasts at the finish line of the Boston Marathon in the US on Monday. This could prolong lacklustre economic activity prevailing in the post global financial crisis era.
The blast was followed on Tuesday by the release of worrying report by the BofA Merrill Lynch. The BofA Merrill Lynch Fund Manager Survey for April warned that global investors were moderating their earlier exuberance in the face of lower conviction over prospects of global economic growth. On the same day the International Monetary Fund (IMF) revised downwards global economic outlook. The IMF forecasted that the world economy would register 3.3% growth this year as compared to the 3.5 percent predicted at the beginning of the year.
IMF chief economist Olivier Blanchard was quoted saying “We are in a better place but… we’re not out of the woods”.
Down south, slow global recovery has proved to be a serious drag to economic growth, condemning GDP growth to levels below 3%, far below the required 6% for the country to succeed in its fight against high levels of employment. It is largely troubles in the US economy and the eurozone which haunts the South African economy which is significantly exposed to these regions in export terms.
With three people maimed and hundreds injured, the Boston bombing could be interpreted as showing vulnerability of the US to attacks in the post 9/11 era thus further disturbing the recovery of investor confidence which is bad news for economies around the globe. As displayed in recent disturbance of peace, the post 9/11 period for example, investors tend hog cash or move funds into gold when geopolitical tensions run high. Gold is seen as a safe haven, the best store of value during war times.
Gold has been under severe pressure over past few days losing about 10% of its value over the past weekend and opened this week below the $1350/oz. Some analysts were already calling this slide the beginning of an end of the long gold rally. Remember gold flatted with an all time high of $1900 in 2011 prompting punters to say it will shoot past the $2000/oz mark. As such the declines experienced recently was quite remarkable and taken as signs that investors were gaining confidence on other asset classes and mainly shares.
When this week opened, the gold price appeared to be negotiating a recovery path partly as a result of disappointing economic data from China. The gold price was at one point, early yesterday negotiating the $1400/oz mark. It could be that some investors were unsettled by the Boston bombings and were once more seeking some cover from the yellow metal. Who wouldn’t when the most powerful nation shows such vulnerability?
There can be no justification for such a despicable attack… It deserves to be condemned by the world community,” said the ANC. We call on the government of the United States of America to do everything in its powers to bring to book those that are responsible for this terror act. We also call on the world community under the auspices of the United Nations to join hands in the fight against terrorism”.
If this proves to be an attck by the al-Qaeda or anyone from that direction, you can expect a more intensive and prolonged “war against terror”, which can be a hindrance to investor confidence.
The Boston tragedy comes to add into political tensions caused by the North Korea standoff.
About 49% of respondents in the BofA Merrill Lynch Fund Manager were already expecting the global economy to strengthen in the next 12 months. “This is a decline of as much as 12 percentage points from March. While the threat of a U.S. fiscal crisis has largely receded, anxiety over the eurozone and new risks – particularly the potential for conflict in Korea – has intensified. A hard landing” in China also remains a concern”.
The report said investors’ more cautious stance was reflected in their increased cash holdings. Cash holdings stood at the highest level reported by the survey in six months (4.3 percent). Many South Africans will know the meaning of this after reports that local corporations were holding more than R500bn in cash, money which could used to stimulate the weak economy.
The BofA Merrill Lynch statement noted that the survey continues to highlight fund managers’ call for companies to put their significant volumes of cash to work, or to return it to their owners.
“With a net 60 percent regarding companies as underinvesting in their businesses, 48 percent would most like to see excess corporate cash flow directed to higher capital spending. Thirty-four percent want surplus funds distributed back to them through buy-backs or dividends, with only a far lower 11 percent viewing the reinforcement of balance sheets as a priority”.
“Despite this call for higher capex and their still-benign macroeconomic view, investors are more doubtful about prospects for significant global earnings growth. A net 38 percent now judge that companies are unlikely to raise EPS by as much as 10 percent this year. This stance has grown much more skeptical since March. Their expectations of corporate margin performance weakened similarly”.