Market volatility to remain excessive for next decade

Comment by Stuart Thomson, economist at Ignis Asset Management: "This week's G20 meeting will maintain the flood of public sector liquidity into the global markets. Warren Buffett maintains that it is only when the tide goes out do you find out who isn't wearing swimming trunks. G20 liquidity has provided Speedos for all and the rising tide will lift all asset markets over the next four to six months. However the aging industrialised economies have a massive overhang of consumer and financial sector debt that will once again be revealed once this tide of liquidity recedes in the New Year, which will leave their economies floundering in the shallows.

"There are two major implications for this rising liquidity tide. First, consensus expectations are under-estimating global growth potential over the next couple of quarters. Stimulus will lift US activity well beyond consensus expectations in the third quarter and this momentum is likely to carry over into fourth and first quarter growth. This is the sweet spot for the global economy, but heavy lifting of the public sector multipliers cannot be maintained indefinitely. The second quarter US flow of funds data provided a stark reminder of the scale of consumer and banking deleveraging that must be undertaken over the next few years.

"Higher than expected near-term growth does not eliminate the WWW-shaped outlook for the global economy over the next decade, it merely emphasises that the Great Moderation is history and that economic and financial market volatility will remain at excessive levels over this period. This makes liquidity-driven strategies over the next six months equivalent to picking up tacks ahead of the steam roller. The key factors for this week is how tough G20 leaders are prepared to be on banking capital requirements, more better-than- expected economic data and the temporary risks to overbought risk appetite."