The global economy is drowning under the weight of a third deflationary crisis in less than a decade, according to a financial expert.
First came the credit crunch in 2008, then the Eurozone crisis in 2011 and now the third wave is an impending collapse of emerging markets, says Dominic Rossi, global chief investment officer, equities, at Fidelity Worldwide Investment
Rossi has plotted how the economic problems pervaded markets and discovered they all bear the same hallmarks.
He explained they start in foreign exchange markets, spread through commodities, debt, and equity before finally hitting the global economy
“This is no different,” he said. “I believe in the coming months emerging market securities will bottom out because of years of investing too much and that the correction will involve years of lack of capital and prudent fiscal management to recover.
Golden era has passed
“Modern investors who were around before the credit crunch are likely to view the years leading to the crisis as a golden time for investment.”
Rossi believes the emerging market crisis will have a markedly different impact than those that came before.
“I expect a price and volume shock that will upset global growth and multinational companies,” he said.
“Emerging markets will perform at lower levels that will push down prices and emerging markets will have to shrink their economies to stabilise prices to tackle deflation.
“This means global growth will be choked and output figures will need adjusting in due course.”
For consumers and investors, this is likely to lead to low growth and low interest rates – leading to lower returns on investment for some years.
“I felt that the world economy would stagnate some months back, but hoped as time moved on that the threat would lessen,” said Rossi.
“I hoped a US consumer led recovery would lead the world out of this danger, but it has not happened.”
Rossi explained that for investors, this will mean looking for low long term growth rather than speculative quick hits.
“Investing and innovation by companies rather than hoping policymakers playing the right cards is more likely,” he said.
“I know many companies are doing so already and I believe this is the only realistic exit route from this emerging market crisis.”