World Trade 2010: Fisher Capital Management

One of the more encouraging developments has been the rapid recovery
in the level of world trade. The recession in 2009 had a dramatic effect,
and the volume of world exports dropped by around 12%.

But largely because large parts of the global economy, and especially
China and other countries in South East Asia, were relatively unaffected
by the recession, the rebound in trading volumes had been very
impressive. There is already talk of reviving the Doha round of trade
liberalisation talks that collapsed in 2008. However it will be necessary
for relations between the US and China to improve substantially before
any real progress can be made, and present disagreements suggest that
progress will only be possible at a very slow pace, even if the global
economic recovery remains on track.

Major Equity Markets

Sentiment in the equity markets has been steady over the past month.
Markets in Europe have been unable to resist downward pressure. The
Japanese market is also lower; but there has been resistance amongst
the emerging markets in South East Asia that are supported by more
favourable economic conditions.

The Chinese authorities are obviously determined to prevent their

economy from overheating. The global recovery will therefore only
proceed at a very slow pace, and there may well be setbacks along the
way, although a move into a “double-dip” recession still seems unlikely.
There is also an increased danger of a sovereign debt default by Greece,
and possibly even by Ireland. But the swing in sentiment should not go
too far. So long as monetary policy remains supportive, the global
economic recovery is likely to continue, and this will eventually produce
a sustainable improvement in equity prices. Patience will therefore be
the most important requirement amongst investors until some of the
uncertainties have been resolved.

The Fed is in a very difficult position. The statement after its latest OMC
meeting was cautious about economic prospects, conceding that “the
pace of recovery in output and in employment has slowed in recent
months” and was likely to be “more modest” than anticipated in the
near-term. But monetary policy was left basically unchanged at the
meeting, perhaps because of the “unusual uncertainty” about prospects,
and this caused some disappointment. However there is little doubt
that further monetary easing will be introduced if the position continues
to deteriorate, because the bank’s main priority is to try to maintain
some momentum in the economy. And fiscal policy is also likely to
remain supportive, despite the massive size of the existing deficit.
Congress has been reluctant to authorise additional spending
programmes; but there is intense political pressure ahead of the elections
in November, and further programmes seem likely
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