Fingers Crossed In the Alps

Attendees hope signs of a recovery don’t vanish in the mist | “My investing self tells me that the worst is over”

Christine Harper and Simon Kennedy


“Optimism, but with a sober tone,” was how Bank of America Chief Executive Officer Brian Moynihan characterized the mood pervading the World Economic Forum’s annual meeting. As investors were lifting the Standard & Poor’s 500-stock index above 1,500 for the first time since 2007, executives from Deutsche Bank and Goldman Sachs were quick to couple upbeat assessments with warnings that economies remain fragile. Some bankers fretted that credit bubbles may be forming as central banks pump out cash.

“The crisis gave them a bit of an inoculation psychologically because they can see what can go wrong,” said Harvard University economics professor Kenneth Rogoff. “They’re not as euphoric as they’d usually be when the stock market went up as much as it has.”

Leaders of the largest banks displayed little bravado in the Swiss resort this year, despite a string of upbeat economic data. During the week of the Davos conference, U.S. stocks capped the longest stretch of daily gains since 2004, as companies delivered better-than-estimated corporate earnings, claims for jobless benefits fell to a five-year low, and the index of U.S. leading indicators rose the most in three months.

In China, economic growth accelerated for the first time in two years, aided by a rebound in industrial output, retail sales, and housing, according to a Jan. 18 release from the national statistics bureau in Beijing. Anxiety over the fate of the euro appears to be abating — at least temporarily. The extra yield investors demand to hold Spanish 10-year bonds over German bunds has narrowed to 354 basis points, or 3.54 percentage points, from a euro-era record of 638 basis points in July. Greece’s benchmark stock index has surged 73 percent in the same period. “We’ve chewed through a lot of the problems, and I would say my investing self tells me that the worst is over,” said Goldman Sachs CEO Lloyd Blankfein at a Davos event. Still, “this wouldn’t be the first time that I’ve suggested the worst was over only to find out that there was a bit of a relapse.”

Many of this year’s Davos attendees cautioned against complacency. Lael Brainard, the U.S. Department of the Treasury’s undersecretary for international affairs, warned that “everyone has experienced some positive Januarys that haven’t carried on through the rest of the year.” UBS Chairman Axel Weber said investors need to be prepared for a “bumpy” ride. “Whilst the underlying trend is better, there is still a lot of volatility in the market and it’s not going to be a straight-line recovery,” said Weber.

Another recurring theme in corridor conversations was that markets were buoyed by monetary easing, which has pushed down interest rates and spurred investors to take more risks in search of returns. Market gains could prove fleeting once central bank policies tighten, attendees said. One hedge fund manager at the conference said Colombia’s Jan. 22 sale of 10-year bonds at a yield of 2.72 percent, less than a percentage point above Treasuries, indicated to him that investors may be underestimating risks.

“The world has been overreliant on central bankers; they are the new superheroes,” said Deutsche Bank’s co-CEO Anshu Jain. “Governments and business leaders need to pick up the slack” after central banks created an “artificial glut of plenty,” according to Jain.

Bank of Canada Governor Mark Carney, who will take over the Bank of England in July, rebutted suggestions that monetary policy is “maxed out.” There’s still room for stimulus in the richest nations, and central bankers should be aiming to propel their economies into “escape velocity,” he said.

Lauded for a bond-buying plan that has helped ease borrowing by Portugal, Spain, and Italy, European Central Bank President Mario Draghi said, “The jury is still out” on the recession-hit European economy.

Japan and the U.K. are also shrinking. In the U.S., political gridlock could become an economic hazard if it jeopardizes the dollar’s status as a safe-haven currency. Against this backdrop of risks, the International Monetary Fund recently trimmed its estimate for global growth this year to 3.5 percent from 3.6 percent. “There’s still a lot of muted areas around the world,” said Morgan Stanley CEO James Gorman. “There’s no one running a victory lap just yet.”

The bottom line Despite broad agreement that the world looks better than it did a year ago, Davos attendees put caution before triumphalism.


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