Growth in global economy expected to remain slow
The global economy is expected to continue experiencing soft growth as historical excesses and debt are slowly worked off.
Commenting on his economic report for the third quarter of 2012, Francois van der Merwe, head of Macro Research at Novare Investments, said: "Globally, policy makers are stimulating economies through ultra-accommodative monetary policy, and in the case of some developed economies, through almost synchronised quantitative easing measures. A lot of these measures have removed the tail risks from a macro-economic perspective, but have not been enough to kick-start the global economy into much stronger growth."
Developed and emerging economies should experience a gradual strengthening from the current year's levels, with the IMF now forecasting that developed economies are expected to grow GDP by 1.5% next year, down from the previously estimated 2%, with emerging market economic growth revised lower from 6% to 5.6%.
Improvement in GDP
"While the world is expected to show a gradual improvement in GDP growth, recession-like conditions in the euro-zone are likely to remain for an extended period, despite efforts by policy makers that have allayed investors' biggest fears and drawn a line under the region's financial crisis.
"Importantly, it seems the Chinese economy has bottomed out and will improve from current levels. However, the strong growth rate of the past will not be repeated any time soon. Economic growth remains investment-based, rather than consumption-based, and investments as a percentage of GDP have reached unsustainable levels," said Van der Merwe.
He added that the transition of leadership within Chinese policy making structures caused some uncertainty as there is little insight into how succession will take place and how policy will be influenced.
'Fiscal cliff' can lead to recession
In the US, policy makers need to prevent the drastic automatic tax increases and spending cuts, better known as the 'fiscal cliff', that are implied by existing budget law. They need to raise the federal debt ceiling, and in a timely manner make progress in restoring fiscal sustainability. If the 'fiscal cliff' is not avoided, it could propel the economy back into recession.
Against this background, Van der Merwe said Novare Investments believed global equity markets to be fairly valued, with emerging markets somewhat cheaper than their developed market counterparts.
"In the short-term our concern is that expectations for company earnings are overly optimistic. But over the longer term we expect equities to benefit from their relative attractiveness compared to government bonds, their under-owned status, as well as the portfolio rebalancing effect from quantitative easing which forces investors higher up the risk spectrum."