Following one the worst global financial meltdowns, the economic recovery has exceeded almost anyone’s expectations and will get another jolt when employment numbers begin to improve in the next couple of months, according to Barclays Capital.
The key risk to the markets will be the withdrawal of policy stimulus, in America but especially in China, which “faces an overheating economy growing at breakneck speed and needs slow growth reasonably quickly,” according to Barclay’s global research report.
Although the Fed’s expected tightening will generate some volatility in the asset markets, it is seen as less of a threat because there is no imminent inflation threat, nor any desire to slow growth.
Larry Kantor, the head of research for Barclays, said Wednesday that the global economy has grown at a 4% clip since the middle of last year to return to its pace prior to the economic crisis.
Furthermore, he said the recovery is not in the “late innings,” but rather just beginning.
“The global economy is not only growing but it’s growing at a pretty rapid clip,” Kantor said at a meeting at Barclay’s headquarters. “You wouldn’t know that from reading the newspaper and talking to people. Part of that is because the recovery is being led by the emerging markets and the developed countries have lagged.”
In addition, Kantor said that the labor market is also still weakened, which makes people leery of the recovery’s strength. Yet, he predicts improving employment numbers in the couple of months, which “will convince people we’re in a self-sustaining recovery.”
Kantor also called into question the emphasis many people have placed on budget deficits and the threat of double-dips, which he calls “backward-looking views” at the economy.
Although the deficit will have to be addressed, he argued that recessions breed rising deficits, mainly because the way to fight back at a recession is through fiscal stimulus. As the most recent recession grew deeper, “[the government] threw the kitchen sink” at it.
“[The budget deficit] is not the start of something new, this is a vestige of what we’ve been through,” he said. He added that normal growth is a key to bringing the deficit down.
Going forward, Barclays is recommending investors have significant exposure to equity and credit markets, hedged with a short position in U.S. Treasuries and a long position in volatility. Investors should be rewarded for taking risk over the next few months.