Standard Life: be patient, deleveraging is a long-term process

LONDON | Standard Life Investments, the global investment manager, said on Thursday that the debt deleveraging cycle was showing signs of improvement, especially in the US, while admitting that the process remains a long and complex one after such a major financial crisis.

In the latest edition of Global Outlook, Standard Life Investments highlighted that one of the key features differentiating this business cycle from most of its predecessors was the extent of the build up and then slow pay back of sizeable amounts of debt by the private and public sectors.

“As history has demonstrated, such a deleveraging process can take many years to unwind, during which time consumption, output and productivity tend to grow more slowly than normal. But seven years on from the 2005 peak of the US housing market, there are now signs that the worst of the US deleveraging is coming to an end, although conversely the situation remains difficult in Europe.”

Andrew Milligan, head of global strategy at Standard Life, explained that the firm believes the US housing sector could be on the brink of contributing positively, if modestly, to GDP growth for the first time since the recession ended. The triggers for further improvement include enhancing the viability of the banking system and keeping monetary policy accommodative, with nominal interest rates well below nominal growth rates.

The ability of more parts of the private sector, especially smaller businesses, to gain access to credit should make the US economic recovery more sustainable.

“Nevertheless, risks still remain,” Milligan noted, “part of the resolution to the private sector’s excessive leverage has been transferring it to the government, and the legacy of dealing with that debt burden will last at least the coming decade.”

Standard Life indicated in its press release that, although much of the good news has been already priced into markets, the company still sees favourable prospects. Would their assessment apply to parts of the euro zone, too, which today revealed news of an industrial production positive pick up? Perhaps, but

“In an uncertain world, investors should base their portfolio decisions on their strongest convictions. For Standard Life Investments, this is a preference for corporate bonds versus government bonds, and US and UK equities over their Japanese and European counterparts.”

Well, at least they are upfront.