“Economic Armageddon” would be unleashed across the world by a combination of a “eurozone meltdown and a hard landing in China” but both of these scenarios were increasingly unlikely, the Australian Superannuation Investment Conference has been told.
Michael Hasenstab, a senior vice president and co-director of international bonds at Franklin Templeton Investments, said that while there were “no longer any risk-free assets and the investment environment was difficult”, the possibility of a global meltdown was fading.
“You look at Europe and while the deleveraging for Italy and Spain is difficult, their problems are not on the same scale as Greece,” he said.
“And, there is the poison pill built into the European system, where if Germany leaves – and they know this – then that will mean they won’t sell any more Mercedes or BMWs in Europe outside of Germany.
“If they leave, the Deutschmark will be overvalued and by some estimates GDP will slump by 10 per cent.”
Stay in the game
Hasenstab said he was amused by placards held by soccer supporters at a recent game between the German and Greek national teams. The Germans were holding signs which said “Merkel paid for your tickets”, while the Greek signs read “You’re never getting your money back.”
“It is painful to buy the Greeks tickets, but not as painful as not keeping them in the game.”
The crisis, he said, would come to be seen as a “blessing in disguise” because it had forced reform from Europe’s politicians.
On China, Hasentab said the country would need a banking crisis to create a true hard landing, but this was unlikely in the short term.
Longer term, however, China would face inflationary pressures from labour shortages as the country moved from “middle income to high income”, but any hard landing there was “years into the future.”
“So, are we in a panic scenario? I don’t think so, although I do note that central banks around the world have never printed so much money,” said Hasenstab.
“It will be difficult for fund managers to preserve wealth, let alone grow wealth, but its not time to be stockpiling cans of food and guns for Armageddon.”