VP Bank highlighted five key themes to watch for in 2010

VP Bank highlight five factors will shape the world economy in the wake of the crisis: government debt levels, emerging markets, private consumption, inflation and corporate earnings.

Jörg Zeuner, Chief Economist for the VP Bank Group, presented his 2010 economic forecast at a media conference in Munich and observed that five factors will shape the world economy in the wake of the crisis: government debt levels, emerging markets, private consumption, inflation and corporate earnings.

The G-7 industrial countries and euro zone emerged from the recession in 2009 and are on track to continue the recovery in the first half of 2010. However, the winding down of government stimulus measures combined with anemic private consumption could result in weakening economic growth in the second half of the year, said Zeuner, speaking at a media conference in Munich on the 2010 economic outlook. Among the key factors shaping markets, Zeuner cited still rising government debt levels, the growing importance of the emerging market countries and rising corporate earnings despite weak economic growth.

The problem: High government debt levels are weighing on interest rates and growth

The massive government stimulus programs of recent years have led to a sharp increase in government debt. VP Bank estimates that new borrowing will continue to rise this year in most industrial countries and negatively affect interest rates and economic growth.

The winners: Emerging markets continue to increase their global market share

Emerging markets, notably those of Asia and Latin America, rebounded quickly and resumed their growth. Thanks to substantial financial reserves, they were able to take decisive economic stimulus measures. High export rates — for example in China, India and South Korea — provide a solid basis for sustained growth. These robust exports enhance the emerging market countries’ growth potential and, consequently, their economic importance.

Rising domestic consumption also supports economic growth. Asia remains a promising region for the strategic asset allocation. From a tactical standpoint, Eastern Europe once again offers potential.

The surprise: Private consumption trend remains unknown

Key indicators in the United States signal a positive trend for private consumption. Households significantly deleveraged in 2009, the interest burden is low, the savings rate has nearly reached a suitable level relative to disposable income, consumer confidence is growing and unemployment appears to have peaked. Zeuner therefore believes that U.S. private consumption is increasingly likely to deliver a positive surprise. In the euro zone, however, he sees lingering consumer uncertainty as likely, given the potential increase in unemployment as short-time work agreements expire.

The slow: Inflation is still not a factor this year

Inflation is expected to remain stable this year, with higher energy prices on the one hand and deflationary factors such as stagnating income, slow growth in new lending and unused capacity on the other. VP Bank projects that following an increase in the first months of 2010, inflation will subside during the remainder of the year.

The dynamic: Corporate earnings will rebound sharply

Last year’s equity market recovery was largely driven by central bank policies, liquidity and valuations. This year, the focus will increasingly shift to corporate earnings. High productivity resulting from workforce reductions during the crisis, rising margins through falling procurement prices and declining investment costs should all contribute to rising corporate earnings.

Zeuner points out that the market has barely priced in the expected recovery in corporate earnings, which offers equity market investors further upside potential. One should note, however, that this trend is more volatile than in the previous year.

VP Bank’s overall economic outlook for the year ahead is cautiously optimistic, as Zeuner noted at the recent conference, which was held for the second time in Munich, the bank’s German headquarters. Economic opportunities outweigh the risks, and capital markets offer investors promising investment opportunities.

Singapore, January 20, 2010 – (Nanyang100.com)