"Critical but stable" world nods at more risk

Wed Oct 3, 2012 2:11am EDT
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By Mike Dolan

LONDON (Reuters) - Like a patient in a critical but stable condition, the world economy may be in for years of low, spluttering growth and yet a lack of volatility may be acting as a green light for investors.

The paralyzing effect of economic uncertainty on investment, business and household planning has been stark over the past five years of credit crisis and the deep and synchronized global recession of 2008/2009 is seared into many minds.

Extraordinary monetary and fiscal policy stimuli around the globe look set to continue for the foreseeable future. Yet investors' fear of "tail risks" - or low probability but outsize shocks - still abounds.

Almost three quarters of the 300 U.S. and European pension funds, asset managers, insurance funds and private banks surveyed by the Economist Intelligence Unit for State Street Global Advisors this summer said a significant tail risk event was either likely or highly likely in the next 12 months.

Euro zone break up and global recession topped the list of potential triggers, unsurprisingly.

But does this inate fear match up to reality? Does uncertainty always lead to higher volatility?

JPMorgan's global strategist Jan Loeys pointed out this week that after spiking higher in 2008/2009, global economic volatility has actually collapsed again to its lowest levels since the 1970s - and this is significant for investors' willingness to take on risk.

Global growth over the past three years is the weakest of any post-war recovery, he said, but 42 years of data shows rolling 8-quarter volatility in world gross domestic product (GDP) is back down at record lows and matches the trough of the "Great Moderation" of 2004-2005.   Continued...

An investor looks at an electronic board showing stock price index at a stock brokerage firm in Seoul July 1, 2009. REUTERS/Jo Yong-Hak