Banking on the elusive 'Economic Recovery'

Asian Development Bank (ADB) has painted a not so rosy picture of the emerging economies in its recent study titled "Major contagion and a shocking loss of wealth?" Here are some excerpts from the report:

• The complex and the wide ranging interaction between the financial world and the real economy has already begun to have serious consequences on the emerging economies, and prospects of a fast recovery are remote.
• Economic growth may decline by half in developing economies, emerging Asia may grow at a lower 5% in 2009 (Growth projections for China & India are 6.7% & 5.1% respectively).
• Genesis of the crisis were the growing imbalances - The US embarked upon a consumption binge with low rates of saving and a high fiscal deficit, financed by surpluses of oil producing countries, China & Japan and to a lesser extent by Europe, leading to a weakness in US Dollar.
• The loss of capital valuation of financial assets worldwide may have reached over US$ 50 trillion, equivalent of one year of World GDP (includes erosion in market cap of stocks, loss in value of bonds, depreciation in currencies).
• Net private flows to emerging economies declined from $930 bn. in 2007 to $470 bn. in 2008, and are projected to decline to around $165 bn. in 2009.
• Emerging markets are no longer decoupled - trade in goods and services & remittances and capital flows to emerging markets have risen manifolds in the past five years, the slowdown in global economy has reversed the trend. It may take 2-3 years for a meaningful recovery to occur.

Close on the heels of the ADB report, IMF chief has also issued a grim warning: “The IMF expects global growth to slow below zero this year, the worst performance in most of our lifetimes,” IMF managing director Dominique Strauss-Kahn told African political and financial leaders in the Tanzania.

Given this depressing scenario, stock markets can only go south in the near future (say the next 3-6 months). It may not be a bad idea to sit on cash or even book some profit/ loss in the intermittent rallies.