Investment markets have taken a pounding in recent weeks as investors grow increasingly nervous about developments in the USA and Europe. Economic growth has slowed sharply in these regions and the slow-down is more widespread than previously forecast. Adding to this are fears of an imminent default by the Greek government which could have a flow on effect on other indebted countries and the banking sector. These factors increase the risk of a return to recession, especially in America and Europe, and that would not be good for investment markets.
It has always been expected that following the Global Financial Crisis the return to growth would not be a straight line process. There will be periods of both good and bad news. Think of a person with a life threatening illness, who is on the path to recovery in intensive care but suffering the occasional medical setback. The medium term prognosis for the global economy is good but it is still in intensive care. What is needed now are strong, sensible and credible policies from politicians to bring back confidence and increase certainty. Fundamental change is required.
In amongst all this turmoil, New Zealand is not so badly off. Exports are doing well, wages have gone up, the Rubgy World Cup has given us a boost and the housing market appears to be bottoming out. However, economic recovery won’t be strong and could be held back if the rest of the world deteriorates further.
The medium term outlook for investing in growth assets remains positive, but in the short term volatility will prevail. For investors, prudence is the key word. That means having a bit more in cash than usual and waiting for signs of the next upturn. Market volatility will create opportunities to make money, but just be cautious.