TheEdge
KUALA LUMPUR: While the majority’s view is that the global economy will be affected by the economic turmoil in the US, local fund manager Tan Teng Boo of Capital Dynamics says otherwise.
He has firmly advocated for several months now that the world’s economy is still growing despite constant negative news from the world’s largest economy.
Tan, whose firm manages listed-small-cap ICapital.biz Bhd, said the NYSE has only fallen less than 20% from its peak in Oct 2007, while the fall on of many other stock markets with economies that were in far better shape had fallen far worse.
He said the phenomena indicated that the subprime mortgage problem will remain.
“The subprime problem will remain subprime,” he said in his weekly newsletter.
The second reason for Tan’s optimism is that while large financial institutions had been badly hit by the crisis, the central banks have ensured that there was no credit or liquidity crunch.
Tan also said that the US economy was slowing down but believed a recession remained only in the realm of possibility and not a certainty.
His fourth reason why the US economy would not affect global growth is that China would drive the world economy.
“The global stock market might be coupled in terms of their fall but the economies were ‘totally decoupled’ from that of the US economy as the world economy was still enjoying strong economic growth, led by China,” he said.
Tan says that of the long list of worrying factors, the worst would be the rising US inflation.
“This may prevent the Federal Reserve from easing aggressively (inflation), should the need to do so arises again in 2008, the brokerage firm said.
The rising energy prices had been the biggest culprit to inflation in the US and with prices of oil and many food commodities at all time highs.
However, Tan said that they (Capital Dynamics) were more sanguine because it saw the current rise in inflation rate as a cyclical phenomenon rather than a structural worry.
“As described many times before, the US economy is in a ‘cyclical inflation, secular boom,’ phase,” it said.
The US headline inflation rate in the last 10 years or so has been moving up and down in a cyclical fashion amidst a global boom. At the same time, the core rates has also been has also been moving up and down albeit in a more gradual fashion.
While Tan did not see the US inflation rate falling anytime soon, he felt that this up and down trend will continue.
“Given this theory and the fact that the Federal Reserve was more concerned with job creations in a presidential election year than with the temporary rise in inflation, one can expect the NYSE (New York Stock Exchange) to remain underpinned by monetary easing, reasonable valuations and robust economic growth”, he said.
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