Roubini: Emerging Markets on the Up, Developed Markets Stay Anaemic

(January 3, 2014) — Economist Nouriel Roubini has forecast a marginally positive outlook for 2014, predicting a slight uptick in global growth and a decrease in tail risks.

Nicknamed “Dr. Doom” for forecasting the financial crisis pre-2008, Roubini wrote on the Project Syndicate website that after a year of below-trend growth, the next 12 months looked to be more positive for both advanced and emerging economies.

“The advanced economies, benefiting from a half-decade of painful private-sector deleveraging (households, banks, and non-financial firms), a smaller fiscal drag (with the exception of Japan), and maintenance of accommodative monetary policies, will grow at an annual pace closer to 1.9%,” he said.

“Emerging economies will grow faster in 2014—closer to 5% year on year—for several reasons: brisker recovery in advanced economies will boost imports from emerging markets, the Fed’s exit from QE will be slow—keeping interest rates low, policy reforms in China will attenuate the risk of a hard landing, and, with many emerging markets still urbanising and industrialising, their rising middle classes will consume more goods and services.”

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Roubini also hailed a decrease in tail risks by the end of 2013—risks considered to have a low probability of happening but with high impact shocks if they do.

“The threat, for example, of a eurozone implosion, another government shutdown or debt-ceiling fight in the United States, a hard landing in China, or a war between Israel and Iran over nuclear proliferation, will be far more subdued,” he said.

Despite this, advanced economies such as the US, the Eurozone, Japan, the UK, and Canada, were likely to only achieve marginal growth, if any at all, Roubini continued. This was because both households and companies remained saddled with high debt ratios, leading to an expected continuation of deleveraging.

High budget deficits and public debt burdens will also force governments to continue their painful fiscal adjustments, and the subsequent abundance of policy and regulatory uncertainties will keep private investment spending “in check”.

Living up to his moniker, Roubini went on to list the long-term constraints affecting global growth, namely secular stagnation caused by years of underinvestment in human and physical capital.

And any structural reforms that these economies introduced to boost potential growth will be implemented too slowly, he predicted.

The economist touched on a number of individual countries’ fates: In Japan, “Abe’s government has made significant headway” but there remain big uncertainties, while in the US “economic performance in 2014 will benefit from the shale-energy revolution, improvement in the labor and housing markets, and the ‘reshoring’ of manufacturing”.

Some emerging markets—India, Indonesia, Brazil, Turkey, South Africa, Hungary, Ukraine, Argentina, and Venezuela—would remain fragile in 2014, owing to large external and fiscal deficits, slowing growth, below-target inflation, and election-related political tensions.

The better-performing emerging markets are those with fewer macroeconomic, policy, and financial weaknesses, such as South Korea, the Philippines, Malaysia, and other Asian industrial exporters; Poland and the Czech Republic in Europe; Chile, Colombia, Peru, and Mexico in Latin America; Kenya, and Rwanda, along with the Gulf oil-exporting countries.

Roubini concluded: “The global economy will grow faster in 2014, while tail risks will be lower. But, with the possible exception of the US, growth will remain anaemic in most advanced economies, and emerging-market fragility—including China’s uncertain efforts at economic rebalancing—could become a drag on global growth in subsequent years.”

(January 3, 2014) — Canadian defined benefit pension plans averaged a funding ratio of 93.4% at the end of last year, marking an increase of 24.8 percentage points over the past 12 months.

Approximately 26% of the surveyed plans were more than fully funded at the end of the fourth quarter, compared with 15% in the previous quarter and 3% at the end of 2012.

Will da Silva, senior partner at Aon Hewitt, said the tremendous improvement in the financial health of pension plans should trigger plan sponsors to revisit their funding and investment strategies as they may be closer to their ultimate de-risking objectives than they previously thought.

“Many sponsors will start considering such end-game options as full immunisation of plan assets to plan liabilities, partial settlement of retiree liabilities, or a full plan wind-up,” he continued.

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“At the very least, sponsors should be analysing the plan’s risk profiles to ensure they truly understand how the change in capital markets in the last 12 months affected their plans, and put strategies in place to limit their exposure should capital markets become unfavourable to the plan again.”

The main causes of this increased solvency position were the improved equity market returns, higher long-term interest rates—which rose by 91 basis points over the year—and sponsor contributions toward solvency funding requirements.

The data was echoed by rival consultants Mercer, which has also released its latest round of research on Canadian funds at the turn of 2014.

Its pension “health” index reached its highest level in 12 years at the end of December. The index, which tracks the funded status of a hypothetical defined benefit pension plan, stood at 106% on December 31, up from 82% at the start of the year and at its highest level since June 2001.

Almost 40% of pension plans tracked by Mercer are now fully funded, compared to 6% at the beginning of last year. In addition, just 6% are now less than 80% funded, down sharply from 60% at the beginning of the year.

But Canadian plan sponsors must do more to tackle the risk profiles of their portfolios before they crack open the champagne. In November, Aon Hewitt warned that too many Canadian plan sponsors still had a long way to go in terms of de-risking their pension plans.

Research from November 2013 found only 33% of Canadian plans reduced their equity holdings in the past year, with another 30% planning to continue the trend to divest from equities in the year ahead, causing alarm bells to ring for da Silva.

“Successful plan management can no longer be considered a passive exercise,” he said at the time. “It requires careful attention to long-term funding and investment strategy and a disciplined focus on adapting the strategy to take advantage of opportunities that may arise.”

So severe are the concerns around pension funds’ solvency in Canada that 46% of funds took advantage of funding relief measures offered by the government—which allow for the elimination of debt payments relating to solvency deficiencies, extension of the solvency debt payment period up to a maximum of 10 years, and the use of a smoothed asset value for solvency valuations. Another 30% planned to use the relief in 2014 too.