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Response to Global Survey Indicates Greater Investment Risks Ahead

A recent survey by business consultants McKinsey & Co. suggests corporate managements should come up with new game plans, based on the lingering crises in global finance.

They say signals by players in the financial markets, as well as pundits and policy makers, are espousing an unreal notion that recovery from the recession has begun. However, global business managers are far less certain and exhibiting doubts and confusion about the certitude of a business recovery.

Consultants Caution about Expecting Near-term Recovery

For stock investors, the conclusions from McKinsey’s worldwide survey of 1,600 business executives, delving into their current outlook for the world economy, portends a longer recovery than is generally expected.

Bear in mind that the National Bureau of Economic Research (NBER) – the referees that establish benchmarks in US business cycles – are mum on the subject. Is McKinsey suggesting the presence of that old bromide: “Fools rush in, where wise men fear to tread”?

The short-termed optimists, or are they opportunists, include skilled experts too, however. FED Chair Ben Bernanke said the recession is probably over, according to AP’s Jeaninne Aversa in the Huffington Post of November 16, 2009. In addition, in an address on the same day to the Economic Club of New York, Bernanke said he expects modest growth in 2010. Of course, that raises the question: When is growth a recovery?

Twenty Percent of Managers Look for Meaningful Recovery in 2009 or 2010

In the results of the McKinsey survey, a scant 20% of the executives believed a normal recovery – one beginning in late 2009 – is probable, while 42% held that 2010 would be flat, in terms of economic activity, much less a recovery.

Around 33% held that a form of post-recession blues would be represented by a prolonged sluggishness of less than 1% annually, for several years. The seven percent remainder of respondents in the survey believed that a double-dip recession was the likely scenario.

Except for the 20% of managers expecting a recovery starting in 2009, those expectations are not the earmarks of a true bull market. Naysayers might even see a K-wave forming.

McKinsey Sampled Both Developed and Developing Countries

The survey meisters used a sampling of both developed and developing countries. Representing developed economies were the European Union, United Kingdom, Japan and the United States. Developing countries included Brazil, Central Eastern Europe, China, India and Russia.

They polled managers on expectations for a collection of key economic indicators, which in the macroeconomic category included:

  • Real Estate Markets
  • Consumer Spending
  • Inflation Rate
  • Business Environment
  • Trade Momentum
  • Consumer Confidence
  • Business Confidence.

The study used the following economic indicators in questions about credit and capital markets:

  • Equity Performance and Volatility
  • Credit Availability
  • Cost of Capital
  • Risk Premiums
  • Foreign Exchange Discontinuities.

Developing Countries Rank Higher in Economic Abilities to Cope

McKinsey avers that the survey was broad enough to reflect global conditions and attitudes. In focusing on how managers in individual countries are coping, they say developing countries are better situated and understandably more optimistic than those of developed ones. The following ranking shows how far along countries are, in recovering to the conditions of the prior expansion peak in December 2007.

  1. Brazil
  2. China
  3. India
  4. United Kingdom
  5. European Union
  6. Japan
  7. United States
  8. Central Eastern Europe
  9. Russia

Analysts Point to Three Reasons Managers See Difficulties Ahead

First, they point out that when the unprecedented stimuli by governments and central banks that ended the short-term predicaments in capital and credit markets in 2008 and 2009 are exhausted, what will happen? The study suggests a drying up of risk capital and lower capital returns, in the global financial system.

The next factor in explaining the chaos in expectations among managers is their difficulty in understanding the explosion of economic data, in today’s digital blizzard. News is often relegated to sound bites and passes through the brain in a nanosecond. The big picture even for experts is difficult to focus on.

The third reason for the managers’ plight is the kind of shift going on in the tectonic plates of the global financial bedrock. McKinsey asserts the crisis had multiple land mines, setting off problems that while related, were never in lock step. Consequently, retarded credit paralyzed inventory accumulation, so that purchasing agents are only recently compensating with bigger orders.

Another factor making certainty of recovery obscure is the reduction of consumer debt and a corresponding increase in the US savings rate, which has risen to 4% from pre-recession levels of zero. If national income does not grow, a 1% increment in consumer savings reduces consumer spending by $100 billion in the US.

Surveyors Forecast Suggest Wide Range of Possibilities for US

Following the survey, McKinsey & Co. partnered with the McKinsey Global Institute to develop modeling to master the complexities of the world economy today. They recently developed four economic scenarios for the US economy.

A $2 trillion range in possible outcomes exists in GDP. The spread is from 10% higher than it is today to 3% lower, by 2012. That chasm suggests much risk and uncertainty ahead for investors in US stocks.

Investing in Such an Environment Requires Caution and agility

In view of higher rankings for developing countries, investors might want to look closely at equities and mutual fund shares representing investment in certain foreign regions. The exposure to dollar depreciation could be minimal. The US dollar has already declined 15% in exchange value with the Euro since February 2009, according to data on

However, in the volatile climate McKinsey’s survey reflects, investors should also expect a bumpy ride and remain agile, wherever their holdings are sited.


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