The performance in global markets year to date has done little to convince us that the US will raise interest rates further, or that oil prices are ready to stabilise any time soon, at least for the first half of the year. The recent sanctions lifted on Iran have rekindled to an already burning fire as crude oil prices broke below the $30 barrier for the first time in a decade.

Is a recession on the horizon?

If financial markets are predictors of the economic future then they are pointing towards a recession, as equities, corporate bonds and commodities continue to sell-off across the globe. Furthermore, data figures remain bleak with low to no signs of inflation picking up anytime soon. The headaches governments face are how to ignite market confidence.

It is no secret that the global commodity supply glut over the past year has been one of the factors dragging global markets downhill. The China slowdown and appreciating USD have also had their domino effect on global markets. But does this justify anticipating a recession?

Although commodity prices are at substantial lows due to overcapacity, many would argue that the China slowdown has substantially burdened demand. However, analyst data on Chinese basic materials demand shows that China is still consuming the same amounts as it did over previous years. The problem hence steers mainly from growth. Production is another factor and if commodity producers were to cut production levels, prices could stabilize and bring a glimmer of hope to market confidence.

Investors are panic selling and in my opinion many are waiting for the right entry points and technical bottoms to form before putting cash to work. Since the start of the year, markets have been conditioned by fear. Rightly so, crude oil prices are one reason for such a reaction, but with it comes opportunities. For technical market analysts, many would argue that a rally in equity prices is now overdue based on a perceived bottom in sight and a potential trend-reversal. However, a strong move downwards is also possible should equities break their support levels.

For bond investors, opportunities may arise in cyclical corporate issues as a result of the wider spreads seen over recent weeks, resulting from sell-offs undertaken through continued risk aversion. Eurozone corporate high yield bonds seem to have the most potential, as the policy of the ECB is set to remain dovish in the coming year, supported by fundamentals that continue to improve, albeit at a slow pace.

I believe global dovish monetary policy measures will remain a near certainty for the coming year and that the focus will be shifted onto fiscal reforms that support global fundamentals. We are already seeing such reforms this week from the likes of France, who announced plans to spend over €2bn in subsidies towards tackling youth unemployment. Similar measures around the world and particularly in China, could get the ball rolling in a different direction.

A global recession is not far-fetched given slow growth in Europe and a slowdown in emerging markets but is fully preventable. Should such measures be implemented, we could see less emphasis around oil prices and reinstilled confidence in the financial markets.

Disclaimer: This article was issued by Mathieu Ganado, Junior Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.