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Published on March 20, 2008

A recession in the US economy has been emerging since the global economy changed dramatically. Market turmoil triggered by the US sub-prime mortgage crisis has shaken confidence in money and credit markets worldwide. Now the problem is more obvious, with recent US economic indicators showing worse results than the market expected. Even though policy attention in the US has shifted to aggressive easing of monetary policy and fiscal stimulus to support the economy by cutting the Fed fund rate, lifting market liquidity, altering the tax refund policy, and other economic support plans, there are still no clear signs of improvement.

The market can now be confident that the US economy will be in a period of recession soon.

The Fed is expected to cut its fund rate to below 2 per cent this year. In these circumstances, most analysts believe this will happen by September. They point to the impact on the US dollar, which fell against the euro and touched its weakest level at $1.56, and also dropped against the yen to 99 per dollar. The gold price reached a new high above $1,000 (Bt31,200) per ounce. The oil price surged above $110 per barrel. The rising price of commodity products and food has put pressure on rising inflation in most countries.

In the US, the Fed chief has announced that they are more concerned about the slowdown than inflation - a slowdown will bring inflation down - because the sub-prime mortgage crisis has widely shaken confidence in US money and consumer markets. However, most countries, especially Europe and Japan, still focus more on rising inflation factors than a slowdown, therefore so far they have retained the level of their policy interest rate.

The large financial institutions have already written down or written off bad debts of $40 billion in losses from the US sub-prime crisis, which is just half of total damages assessed so far. Standard and Poor's now estimates that sub-prime write-downs could reach $285 billion, while the G-7 meeting in February expected the write-down could reach $400 billion.

How to invest in a volatile equity market? Since the beginning of this year the world equity market has been volatile due to the US slowdown, tightened lending standards and an unwinding of the yen carry-trade status. Even though the emerging economies' fundamentals are better than the US, their equity markets still tumbled because the sell-off in equities accelerated globally.

In this situation, I would recommend short-term investors to hold cash until there is any indicator of enhanced market confidence in the third or fourth quarter this year. However, the equity market is still very attractive for long-term investors. In that case, if investors can deal with the volatility, it is not a bad idea to start to accumulate now.

Suttinee Simakulthorn is a fund manager with Asset Plus Fund Management.

Suttinee Simakulthorn

The Nation