Overdoing the doom and gloom
Off The Record is an opportunity for readers of Investment & Pensions Europe to say what they think about topical issues. This month's Off The Record looks at the year ahead and asks what we can expect in 2008.
First a mea culpa. We wrongly suggested in the questionnaire sent out to our readers that Niels Bohr, the Nobel prizewinning nuclear physicist, was the author of the observation that "prediction is very difficult, especially if it's about the future".
As the manager of a leading Danish pension fund has pointed out to us, Bohr attributed this remark to Robert Storm Petersen (1882-1949), a Danish artist and writer also known as Storm P. Apparently, Bohr used to quote this saying to illustrate the differences between the Danish and Swedish sense of humour.
In our defence, there is some dispute about whether Storm P ever said this, and other people, notably Mark Twain, have been suggested as the author. Nothing is as uncertain, it seems as, the source of quotations about the uncertainty of predictions.
However, 2008 is a year that invites predictions. Some economic commentators predict a bleak year, as the consequences of rash lending to homebuyers in the US spreads out into European and eventually global markets.
Prominent among the doom-mongers is Saxo Bank, a Danish online investment bank which each year attempts to predict ‘black swan' events - rare, high impact occurrences that are well beyond what we might normally expect.
Saxo predicts among other things that in 2008 there will be a recession in the UK, a 40% fall in China's stockmarket and a doubling of the price of oil.
Others think that this ‘gloom and doom' scenario is wildly exaggerated, and that there is a danger that such prophecies could become self-fulfilling. Richard Lambert, director general of the UK's Confederation of British Industry, predicts a soft landing for the US and Europe and says: "It is important not to talk ourselves into something much worse".
So who is more likely to be right? We wanted your views on some of the macroeconomic predictions that have been made for 2008.
The biggest question, and the one that will have the biggest repercussions, is whether the US will move into recession, defined as two consecutive quarters of negative growth during the year. Currently the consensus among economists is that there is a 40% chance of this happening.
The pension fund managers, administrators and trustees who responded to our questionnaire are rather more pessimistic however. A small majority (53%) think that there will be a recession in the US in 2008.
There is a feeling that the worst is still to come. A Dutch pension fund manager points out that once the full extent of the losses from the sub-prime lending crisis and its effects becomes clear a US recession is inevitable. "We will know the real extent of the losses when the year-end figures are presented, and that will drive sentiment down."
Gloomier commentators predict a sharp fall in share prices globally in 2008. Yet most managers (63%) think this unlikely. Of those who do expect a fall in share prices, most expect this to be only a temporary phenomenon. A Dutch manager suggests prices will fall until June or July and recover thereafter, while the manager of a Spanish pension scheme says prices are likely to fall at some point in the year but not over the long term.
The price of oil is perhaps the single biggest threat to pension fund managers' peace of mind in 2008. Saxo Bank suggests that the price of oil will rise to $175 a barrel in 2008. We suggested a more realistic, albeit unprecedented, figure of $100, and found that three in four managers (74%) agree that it will reach this level.
The problem with predictions is that they can be overtaken by events. The price of oil has already reached $100 a barrel. In January, an independent market trader who wanted to achieve a moment's fame as the person who pushed oil prices up to $100-a-barrel mark, bought 1,000 barrels of crude oil from a colleague, and then sold them back, making a loss of $600.
Perhaps the minority (26%) of managers who say they do not expect a rise to $100 a barrel are justified in feeling that this artificially manufactured spike in the oil price does not really count.
One of the most plausible predictions for 2008 is that China's stock market bubble will burst. Prices on the Shanghai Stock Exchange rocketed last year, fuelled by a wave of speculative domestic money. Managers of Asian institutional funds are now predicting a sharp correction.
Their fears are partly endorsed by the pension fund managers in IPE's survey. A majority (58%) think that the Chinese stockmarket is in for a fall this year.
Another imponderable is the future of the US dollar, currently weak against both sterling and the euro. Some economists have predicted that 2008 will be the year when the dollar stages a comeback against the euro.
However, pension fund managers are sceptical. Only a third of our suvey (37%) think the dollar will regain strength in 2008. The manager of a Dutch pension fund suggests bluntly that a recovery in the dollar will be conditional on a change in US foreign policy: "There will be no comeback of the dollar until a new president ends the war in Iraq."
As the threat of recession looms over the US there is pressure on the Fed to lower interest rates. Whether the UK will be forced to follow remains to be seen - so far, the Bank of England has held interest rates steady. So will central banks in the Anglo-Saxon economies be forced to lower interest rates in 2008? A large majority of pension fund managers (89%) think they will.
However, the anti-inflationary stance of the Bank of England and the European Central Bank gets some implicit support, since two in three (63%) agree that rising inflation will remain the main concern in developed countries in 2008.
A smaller, but still substantial majority (79%) think that the credit crunch will feed through to the high street and that commercial banks will tighten their lending conditions in 2008. Some pension fund managers take a pragmatic view of the credit crunch. One manager comments: "There will be more tightening of lending, certainly, but on the other hand trade must go on."
In a recession there are few winners. Yet the 29 sovereign wealth funds look to benefit from the current difficulties that some US investment banks are experiencing. They have used some of the $3trn they hold buying up stakes in banks like Merrill Lynch and Citigroup that need to build capital fast.
So we suggested that the main beneficiaries of the ‘credit crunch' in 2008 will be the sovereign wealth funds. Opinion is divided here, with a minority (48%) in agreement.
Fears of a recession are likely to encourage people to spend less, and a majority of managers (69%) agree that people in the US and Europe will start to save rather than spend in 2008.
And finally, will the problems of 2008 roll over into next year? In particular, will the impact of the global credit squeeze continue to be felt in 2009? Here, opinion is equally divided. As Storm P might have said, prediction is very difficult.