By Charles Ross, ContributorDEVELOPMENTS IN the United States bond and equity markets continue to confound the expectations of both investors and economists, as we get further into the year 2003. The US economy and financial markets are so large that they have a significant impact on those of the rest of the world - especially markets in the western hemisphere.
Although the US economy grew at the fairly respectable pace - for a large industrialised country - of 2.4 per cent last year, employment creation has not yet recovered significantly and business investment has not yet started to grow at a satisfactory pace. These two factors are key to the achieving of strong and sustained growth in the US economy and that, in turn, will be a central factor in the revival of the world economy. An increase in employment creation will be a very important factor in boosting consumer confidence, which has been on the decline in the US in the past few months.
Consumer spending accounts for about two-thirds of US GDP and it is the strength of consumer spending that has caused the recent recession to be such a relatively mild and short one. If consumer spending slows before corporate investment - the other major pillar of the US economy - begins to show stronger growth, that economy could slip back into recession or, at best, slow down to a very anaemic rate of growth. It is thought that consumer confidence is being affected by the large number of job losses that have occurred over the last two years and the fear is that the higher levels of uncertainty on the employment front may lead to a reduction in consumer spending. At the same time that consumer confidence is falling, business investment is being hampered by the uncertainty surrounding the imminent war in Iraq.
In the short term, all this has led to another round of downward movement in the US stock markets and an upward movement in bond prices. The yields on US government bonds have fallen to even lower levels than those which prevailed last October when bond yields hit a 40-year low. The six-month US Treasury Bill is yielding 1.18 per cent and the yield on the 10-year Treasury is down to 3.7 per cent. There is even talk now of a further rate cut by the Federal Reserve when next their Open Market Committee meets. While in the short term this may be good news for US bond holders, in the medium term they face the risk of significant losses when interest rates inevitably begin to rise again and bond prices consequently fall. These developments bring a mixture of good news and bad news for developing countries.
The good news is that, despite a very risk averse mindset which has developed among the investing community in North America, yields on US bonds are so low that investors are being forced to look at riskier credits in order to pick up extra yield and earn a better overall return on their portfolios. This is pushing some funds into emerging market bonds and the larger countries like Brazil and Mexico are enjoying a bit of a rally in their bond prices as a result. We are also seeing a number of developing countries bringing new bond issues to the international market to raise funds. This situation could augur well for Jamaica's ability to successfully issue new bonds later in the year but to take advantage of this more favourable international market we will have to take fairly radical policy action in our upcoming budget. We will have to come up with a credible budget which reduces our fiscal deficit and will also have to demonstrate our ability to stay within that budget and meet the targets that we set to achieve. International investors have become much more discriminating when choosing among the various emerging market countries and in a climate where they are becoming more risk averse, Jamaica's economic fundamentals will play a very large part in our ability to borrow on the international capital market.
Charles Ross is Managing Director of Sterling Asset Management Ltd. Feedback:
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