Global economy no place for short-term investors

Suttinee Simakulthorn

But let's look more closely at the economic trends over the past month in the major countries and regions: the US, Europe, Japan and elsewhere in Asia.

In the US, major economic numbers indicate a significantly slowing economy. The non-farm-payrolls report, the Consumer Confidence Index, high oil prices and employment all confirm that a US recession is possible. Housing-sector figures continue to be very poor. Starts on home construction fell 28.4 per cent year on year, while existing home sales fell 22.9 per cent year on year. Inflation rates remain high. Headline inflation is 4 per cent and core inflation 2.3 per cent, both year on year. As a result, the US Federal Reserve decided to cut its Fed funds rate to 2.25 per cent and the discount rate to 2.5 per cent last month in an effort to boost economic growth.

In Europe, the economic trend is towards a slowdown because of credit-market pressure, declines in exports and the strength of the euro. The European Central Bank recently adjusted its economic growth forecast for this year downwards, from 1.5-2.5 per cent to 1.3-2.1 per cent, due to high prices for both oil and food, which are expected to affect exports. The central bank predicted inflation would continue to move up and decided to maintain the refinancing rate at 4 per cent.

In Japan, consumer confidence declined in the first quarter, but growth continued in both private investment and exports.

However, the high inflation rate appears to be hurting purchasing power and consumer confidence. Japan has maintained the level of its uncollateralised overnight call rate at 0.5 per cent, as expected by the market.

Most Asian economies have continued to grow but at a slow pace. Inflation rates have moved up, because of high food prices. Most Asian export numbers have also moved up, except for those in China, which have declined dramatically, especially for exports to the US. The China central bank increased its reserve requirement to 15.5 per cent, in order to manage bank liquidity and prevent the overexpansion of cash and credit. However, Hong Kong's central bank cut its base rate to 3.75 per cent, in line with cuts in the US federal funds rate.

Confidence in money and credit markets around the world has been shaken by the fact that the US credit crisis seems to be worse than expected. Therefore, investing at present is a highly volatile business. I recommend that investors who can deal with volatility place their money in equity markets, long term. Short-term investors may be better off if they hold cash until the situation settles down, maybe in the second half of the year.

Suttinee Simakulthorn is a

fund manager at Asset Plus Fund Management.