The Analyst: The East has cash, the West has debt

I am writing this article on Wednesday, some 24 hours after the US Federal Reserve surprised the markets by cutting interest rates by 0.75 percentage points. Many commentators have suggested that this was an attempt to rescue the equity markets, but I don't actually think that is correct.

In my view, the move has much more to do with helping "monoline" insurers – these are companies that insure the debt of other companies, and they are themselves running into trouble. If they start going belly up, then we could enter a new and more dangerous leg of the credit crisis could start. In the end, the US government could have to step in as a final guarantor.

There is an awful lot of bad news already priced into the markets, so the question is how much worse things will get. I really have no idea whether we will go into recession, although a poor housing market in the US is going to be a significant drag on growth for some time.

History suggests that if the US and Europe do go into recession, then company earnings could fall by as much as 33 per cent, and stock markets usually fall by about 25 per cent during these periods.

Given that our own stock market is around 20 per cent down since its peak, we could be within around 10 per cent of the bottom. I am grateful to Julian Chillingworth, the chief investment officer at Rathbones, for these statistics.

I think the events of 2007 and so far in 2008 mark the start of a gradual shift of economic power from the West to the East. Our credit problems are home-grown, with consumers and governments alike mired in debt. It is interesting to note that central bank reserves in the US total about $55bn (£28bn), and that last year they fell by about 2.5 per cent. By contrast, the cash reserves of the Arabic Gulf States alone rose by 40 per cent last year to $1,000bn.

You might have noticed that most of the US banks (Citigroup, Merrill Lynch etc) have been bailed out by sovereign wealth funds from the developing economies. It is now the developing world that has the cash and the developed world that has the debt.

However, this kind of change brings opportunity with it. Four-fifths of the world's population lives in the developing world, and much of it is industrialising at scarcely credible rates and creating wealth along the way.

In my view, these economies are not totally "decoupled" from the US economy, but I certainly believe that they are better insulated from a US recession today than they were even a couple of years ago. I also believe that falls in these markets represent excellent entry points for long-term investors prepared to take a 10-year view on their investments.

The demand for oil will grow as Asia and other emerging markets continue to industrialise and urbanise. You simply cannot turn off major infrastructure projects overnight, and I am sure that the price of oil won't fall simply because the UK economy gets squeezed.

I wouldn't advise that you sell all your investments in Western markets, but it seems likely that 2008 will be a tough year. Interest-rate cuts alone will not solve the credit problems, and they are unlikely to fuel extra consumer spending as money will be needed to pay off debt and to pay higher fuel bills.

The long-term opportunities seem to lie in the developing world, and I have already covered some of the top funds in these pages. I would reiterate my view that the JM Finn Global Opportunities Fund is an attractive option. The manager focuses on the infrastructure projects – such as power, toll roads, rail, shipping and pipelines – that are vital for the emerging market industrial revolution to continue. This could be a profitable, if somewhat volatile, area to invest for the next 20 years.

In conclusion, I don't think that we are out of the woods yet. We can only relax when we are able to trust the banking system (and banks are able to trust each other) and we know where all the liabilities are.

So; fasten your seat belt for a bumpy ride this year, but if you focus on the long-term potential of global markets you should be able to weather the turbulence.

Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at

Suggested Topics
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Business Analyst - Financial Services - City, London

    £50000 - £55000 per annum: Ashdown Group: Business Analyst - Financial Service...

    SThree: Trainee Recruitment Consultant

    £18000 - £23000 per annum + OTE £45K: SThree: At SThree, we like to be differe...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + competitive: SThree: Did you know? SThree is the o...

    Recruitment Genius: Administrator - IFA Based

    £22000 - £24000 per annum: Recruitment Genius: This is an opportunity to join ...

    Day In a Page

    General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

    Chuka Umunna: A virus of racism runs through Ukip

    The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
    Yemen crisis: This exotic war will soon become Europe's problem

    Yemen's exotic war will soon affect Europe

    Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
    Marginal Streets project aims to document voters in the run-up to the General Election

    Marginal Streets project documents voters

    Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
    Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

    The real-life kingdom of Westeros

    Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
    How to survive a social-media mauling, by the tough women of Twitter

    How to survive a Twitter mauling

    Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
    Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

    At dawn, the young remember the young

    A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
    Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

    Follow the money as never before

    Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
    Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

    Samuel West interview

    The actor and director on austerity, unionisation, and not mentioning his famous parents
    General Election 2015: Imagine if the leading political parties were fashion labels

    Imagine if the leading political parties were fashion labels

    Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
    Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

    Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

    The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence
    Public relations as 'art'? Surely not

    Confessions of a former PR man

    The 'art' of public relations is being celebrated by the V&A museum, triggering some happy memories for DJ Taylor
    Bill Granger recipes: Our chef succumbs to his sugar cravings with super-luxurious sweet treats

    Bill Granger's luxurious sweet treats

    Our chef loves to stop for 30 minutes to catch up on the day's gossip, while nibbling on something sweet
    London Marathon 2015: Paula Radcliffe and the mother of all goodbyes

    The mother of all goodbyes

    Paula Radcliffe's farewell to the London Marathon will be a family affair
    Everton vs Manchester United: Steven Naismith demands 'better' if Toffees are to upset the odds against United

    Steven Naismith: 'We know we must do better'

    The Everton forward explains the reasons behind club's decline this season
    Arsenal vs Chelsea: Praise to Arsene Wenger for having the courage of his convictions

    Michael Calvin's Last Word

    Praise to Wenger for having the courage of his convictions