14 January 2008 (Hong Kong) - Developed economies will be in recession, whilst slower growth is expected for emerging economies in 2009. Headline inflation rates which include food and energy prices have been plunging drastically over the past few months, implying deflation ahead for some economies in 2009.

"Though originally perceived as a subprime housing problem and a housing finance problem, the gradual spread of the crisis to all parts of the US economy made it clear that the credit crisis had much wider origins, namely the huge build-up of debt in the household and financial sectors since 2002," said John Greenwood, Chief Economist of Invesco.

The large wealth losses from falling house prices and falling equity prices are creating substantial negative wealth effects, and will constrain US consumer spending. In the face of weaker demand and persistently tight credit, businesses will be cutting expenditure. Effects of the government stimulus plans are unlikely able to offset the decline in private sector spending in 2009.

"The priority for consumers and businesses at the moment is to restore sound balancesheets by repaying debt. It may take some more time before normal private sector spending patterns resume in the US. I forecast US's real GDP (Gross Domestic Product) growth for 2009 to be -1.8%. Economic recovery is most likely in 2010 and beyond."

John Greenwood expects the US dollar strength to persist while the deleveraging process is continuing, but when that comes to an end, the US dollar will be vulnerable to depreciation.

In the UK, economic conditions deteriorat ed abruptly towards the end of 2008 as consumers and corporations sharply reduced spending and investment. Alongside other major economies, the Eurozone moved into recession in 2008. John Greenwood forecasts real GDP growth to be -1.5% and -1.6% for the UK and Eurozone, respectively, for 2009.

"Reductions in borrowing by UK households, falling house prices and negative wealth effects, along with the weaker pound are likely to curtail consumer and corporate spending severely."

"The Eurozone economy will remain in recession for most of 2009. However, when the recovery does come, the lower levels of indebtedness across most of Europe, together with the effects of more moderate monetary easing should enable the Eurozone to have a more durable expansion, said Mr. Greenwood

Stock markets will continue to be volatile, as they are in the middle of a tug-of-war between plunging economic activity, falling sales growth and declining profits on the one side, and government and central bank rescue and stimulus plans on the other.

"The silver lining is that inflation will fall quickly, and official interest rates will stay low for an extended period. This should provide a very favorable environment for fixed income investment, corporate bonds in particular, and build a base for an extended upturn in equities," concluded Mr. Greenwood.

Growth remained vigorous across Asia during most of 2008, but exports have fallen sharply in recent months as overseas orders have fallen.

"Apart from high underlying growth rates and high savings rates, the main difference between Asia and the rest of the world is that Asia does not suffer from the extended, over-indebted balance sheets seen in the US or the UK. Consequently the Asian economies seem well placed to be the "first out of the gate" when the global economy eventually recovers," remarked Mr. Greenwood.

Paul Chan, Chief Investment Officer added, "Asia's economic performance has been relatively robust versus its western counterparts. Although growth will slow across the region this year, the key drivers – China and India, are still anticipated to grow at around 8% and 6%, respectively. "

Whilst impact of the current crisis on the economies has further to go, the financial crisis is believed to be coming to a close. Mr. Chan does not expect to see the collapse of financial institutions much more, and believe that much of the worries over the economic fortune have been reflected in security markets.

Mr. Chan continued, "Studying previous stock market cycles might give us insights as to where we are now. Take the 13 previous US recessions since 1929 as a proxy, on average, it takes 16.4 months for the Dow Jones Industrial Average to go from peaks to troughs, and now we are 15 months away from the last peak. History may suggest that the equity market may not be too far away from the bottom, though it is still an early call as the current crisis is no typical recession."

With prospective P/E (price-earnings ratio), price to book and dividend yield trading at 9 times, 1.5 times and 4.5% respectively, all these figures suggest that Asian valuations are inexpensive.

"Consensus corporate earnings forecasts still lean towards the optimistic side, we are mindful of the risk of more earnings downgrades to come out over the next few months. As such, the equity markets are likely to remain volatile for some time. Excising caution in stock selection in this highly volatile environment is crucial," remarked Mr. Chan.

Investors may want to avoid commodity related companies, cyclical industries, and highly geared companies that are more vulnerable to refinancing risk or recapitalization risk. Instead, those with solid balance sheets, low gearing and strong recurrent cash flow are more preferred, in addition to strong pricing power and competitive advantages in the industries, according to Mr. Chan.

Invesco's current Asia regional asset allocation preferences are the markets of China, Hong Kong, India, Thailand and Indonesia.

Invesco continues to have confidence towards the China market. Whilst cyclical slowdown is inevitable, the medium-term secular growth trend remains intact. The Chinese government has taken a very proactive stance in simulating the economy. The stimulus package announced in November 2008 alone will lead to substantial spending in infrastructure-related areas. The scale of the plan is huge and is likely to meaningfully counter the slow down in export growth.

"Overall, as downward earnings revisions die down, it would be a good opportunity to consider getting back into the Asian equity markets for its strong long-term potential. Investors could consider using a balanced approach to do so in order to manage the risk down," concluded Mr. Chan.