A destabilising economic downturn will take place in the near future and it will cause some stress for asset managers, but it is not a doomsday scenario according to one executive.
Michael Thawley, vice-chairman of Capital Group International, made the comments at Morningstar’s annual Investor Conference after telling the room of the upcoming economic signs to watch out for.
“I don’t want to sound as if I’m in a gloomy state of mind its clearly going to give us heartburn as asset managers and investors but it’s not a doomsday scenario,” he said.
Mr Thawley said the next downturn would likely have a big effect on markets despite government efforts to counteract it.
“The next economic downturn is likely to have a destabilising effect on the bond and stock market and probably currencies as well. I'm not pessimistic about government efforts to counteract the next downturn or recession but those efforts will take place in a very different global strategic and economic environment,” he said.
In fact, the impact on markets from the next downturn may mean that we do not return to the same robust growth path we are used to said Mr Thawley.
“The traditional levers that central banks and governments will be able to deploy are going to be less powerful and more problematic than we are used to,” he said.
Investors have got used to a decade of benign markets said Mr Thawley and Australian investors were not used to a wobbly market.
“Investors have got used to a very benign market with relatively little volatility and an expectation that if markets get the wobbles of any serious dimensions, central banks will come to the rescue particularly in the case of Australia.
“The environment here is even more benign than the rest of the world due to steady inflows from super savings and 28 years of steady economic growth,” he said.
A downturn was inevitable, said Mr Thawley, and over the next year or so investors needed to prepare for the situation.
“We need to make sure our portfolios are tested to the extent possible against the risks and we need to understand the changing situations facing the companies in which we invest,” he said.
The Australian government had already started to act with new tax cuts and infrastructure spending, said Mr Thawley, but there was still scope to do more.
“There is scope for governments to do more, generally speaking, and I don’t know if Australia stands out in that regard.
With tax cuts coming, a huge investment infrastructure program already underway, and defence capabilities increase underway there is already things happening, so I am very confident about the Australian economy,” he said.
Mr Thawley said though that this was a vastly different world to the past downturns, and it would become more apparent by the end of the cycle.
“The fact is we are in a very different world and this is going to be much more apparent as we come out of the next downturn than it is before we go into it. "