Market volatility and an uneven path for the economic recovery are set to continue for years, according to Towers Watson. What’s more, all asset classes will face higher-than-average volatility, Towers Watson said.
“The events of the past several days are consistent with the outlook we had prior to these global events—that we expect a bumpy path to recovery, with pressures from the debt overhang materializing in places that are hard to predict,” said Carl Hess, global head of investment at Towers Watson.
Towers Watson looked at three recent events and their impact on the global markets.
First, fear of a U.S. recession and a sharp slowdown in global growth. As developed nations are deep in debt, Towers Watson expects “worse outcomes are more likely than very good outcomes over the medium term. The material slowdown in U.S. economic growth has heightened fears of a recession.”
Second, as to the U.S. sovereign downgrade, the company expects more selling of equities in the next few days, but not of bonds. Towers Watson does expect, however, a modest increase in U.S. borrowing costs and for foreign investors to diversify away from U.S. dollar assets.
Third, as far as the Euro-zone crisis is concerned, Towers Watson sees the problems of Greece Ireland and Portugal spreading to Spain and Italy. Nonetheless, the July 21 European Union summit plan was a significant step in stemming such contagion.
These problems will continue over the next few years, Hess said, and the only way for investors to combat them is to diversify their portfolios.