Fear of double-dip recession lingers

European confidence in the economic outlook improved to its best level in more than two years, according to the European Commission (EC) in Brussels; but unease and concern among investors that a double-dip recession may still be awaiting the world economy remain firmly in place as share markets still seem to be stuck in the sideways trajectory that has been around since October last year after an initial upward trend during the preceding six months.

The EC announced last week that an index of executive and consumer sentiment in the 16 euro zone countries increased to 101.3 during July, compared to 99 in June. It represents the highest level since March 2008.

After the shock to economic outlook confidence by the Greece-led budget deficit crisis, Europe’s economic prospects seem to be improving as companies - from major banks to luxury goods manufacturers - have surprised with the profits they were able to post. Growth in services and general manufacturing also accelerated during July and some European analysts claimed they are detecting clear signs of stabilisation and recovery of the global economy.

There may, however, be an element of talking the market up present. Not all have been convinced after the thoroughness of last month's stress tests on European banks; and casting a wider eye beyond Europe reveals that some real risks are still out there.

Other analysts point out that while markets initially moved up strongly since March last year on the back of stimulus packages deployed by governments in particularly the developed world, they started running out of steam by October last year and went into sideways movement. As the stimulus measures slowly started tapering off, the economic activities they were driving also began slowing down and the picture is not as rosy as it seemed a few months ago. Uncertainty and volatility have become the order of the day which investors have to try to navigate.

The Morgan Stanley Capital International world stock market index, based on some 1 500 international stocks, remained largely unchanged since October last year as the fear of a double-dip remains strong among investors.

These fears are fuelled by, among others:

• Concerns that the sovereign debt crisis in Europe could trip up growth in the global economy;
• A slowdown in the growth of the Chinese economy;
• A slower than expected rebound by the American economy where consumer confidence last month dropped to its lowest level in a year; and
• Uncertainty whether the corrections that have taken place in the global financial markets and property markets, in particularly the US but also elsewhere, have run their full course yet;

Alwyn van der Merwe, investment director at Sanlam Private Clients, was quoted by Sake24.com last week as saying that even some of the best research houses in the world are unsure where markets are heading.

Also indicative of this is the fact that the euro showed little change in response to the EC report of an improved economic outlook.

Domestically, data released by the Reserve Bank indicated that the economic recovery remained vulnerable. The bank’s composite leading indicator, which signals growth some months ahead, dipped from 131.3 in May to 130.6 in July. It was the first contraction since July last year.

Also down were the coinciding and lagging indictors, confirming fears that the revival in economic activity could be losing momentum.

For now, caution seems to remain the wisest approach on the investment front.