Adrian Saville, CIO of Cannon Asset Managers, assesses the post-crisis investment landscape and suggests the best investment avenues…

Measured by economic and financial criteria, the global economic meltdown of the past two years is unprecedented. Commodity prices collapsed, international trade fell 10 percent between 2007 and 2009 and the world economy went into recession for the first time since the end of World War II.

Further, the financial mess has seen many firms disappear, including former icons such as Bear Stearns and Lehman Brothers. For many others, survivorship has required substantial adjustment by the firm.

In this turbulent environment, the world’s equity markets lost $35-trillion in capitalisation over the 15 months to the end of March 2009.

Policy makers have responded to the meltdown by using three main tools. Firstly, aggressive easing of monetary policy actions have been undertaken to help thaw financial markets. Secondly, policy makers have tried to repair business sentiment by providing rescue packages for ailing firms. Thirdly, to restore consumer sentiment and bolster real economic activity, governments have put in place generous fiscal packages, such as the $800-billion spending programme in the US.

BRICs growing rapidly despite recession

Recently-released economic data reveal that these policies have had some positive impact. For instance, it appears that the Western European and US economies have troughed. Further, economies in other parts of the world, including Brazil, China and India, have taken solace from the forceful policy actions, managing to grow rapidly this year despite the global recession.

In turn, capital and commodity markets have been spurred on by the policy cocktail. Global equities, for instance, have recovered $20-trillion of the $35-trillion paper wealth that was lost. In similar fashion, commodity prices have rebounded, with oil prices 100 percent higher than earlier this year.

Read together, the recent economic data and the market price responses suggest that the world has seen off the worst of the global financial crisis. However, this view seems short sighted given the adopted policy cures are made of the same poison that caused the crisis, in particular, an abundance of easy money. For investors, then, the question becomes what lies beyond the short-term policy and market reactions?

In part, the answer to this question resides in accepting that the financial crisis has caused debt mountains to grow instead of shrink, particularly in the case of advanced economies such as Japan and parts of Western Europe.

Why the dollar is toast

The headline grabber, though, has to be the US economy, where the debt-to-GDP figure is in excess of 100 percent. If the US government’s off-balance sheet debt is added to the equation, national debt balloons to more than 500 percent of GDP. If a national debt-to-GDP figure of around 75 percent is considered to be a red line, and that these advanced economies have shrinking workforces, it follows that some of the biggest and most advanced economies are in debt traps.

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