WORLD ECONOMY AT THE CROSSROADS

This year will go down in financial and economic history as an “annus horribilis”. All asset classes apart from government bonds and money market investments have pretty much plummeted in value. Equities have been worst hit, especially in the emerging markets sector. Volatility has reached levels not experienced for at least 35 years. The world economy has arrived at a crossroads. Where are the financial markets heading?

Basically, three scenarios are conceivable. A collapse of the financial system is improbable. This scenario would speed up the process of writing off debt and lead to a serious economic depression accompanied by deflation. Further deterioration in the situation is unlikely. This situation would require additional and even more aggressive measures to prevent a deflationary downward spiral in the economy.Most probably, the situation should continue to stabilize as confidence gradually returns. Even in this best-case scenario, however, a recession is inevitable, and the economic recovery will prove fairly weak. Inflation should decline further and remain low for some time. The Swiss equity market could then rally strongly in the next twelve months, because expectations for future economic growth have already fallen to very modest levels. So there is a good chance that they will be exceeded.It is too soon to sound the all-clear signal, however. Safety and diversification therefore remain the top priority at the moment. It is especially important to diversify across different asset classes so as to be prepared even for the worst case scenario, unlikely as it is.