Investing Daily

Athens, Greece--The US recession, the deepest since WWII, should end at some point this summer. From our current vantage point, it appears that the prospects for global growth aren't as dour as many analysts predicted at the beginning of the year.

As I forecasted in this publication as well as The Silk Road Investor, the big emerging markets are doing their part to support the global economy, while conditions in the US continue to stabilize. Important economic indicators such as employment, income growth and sales appear to be bottoming and, in some cases, even showing signs of improvement.

Although I expect the Federal Reserve will ultimately raise interest rates to rein in inflation, I still think that the market is premature in discounting the prospects of a higher Federal Funds Rate. Ben Bernanke and his cohorts are unlikely to raise rates in the June 24 or August 12 meetings. There's a possibility that such a decision could come in September, but that's far from a certainty; the Fed won't act until it's pored over the economic data and can be sure about the magnitude and strength of the pickup.

That said, the recovery will be weaker and more gradual than what the majority of market commentators now expect. The damage done to the US economy by wild securitization is of unprecedented proportion and will take many years to fix.

Because of the relatively subdued growth cycle, I still expect a more deflationary outcome than most. Housing related activity still represents 40 percent of core CPI in the US, and real estate markets will take a lot of time to find their footing; investors shouldn't worry about inflation over the long term.

Turning to the markets, the rally remains solid and stock prices should hold steady in the near term as investors evaluate the economic recovery. I still expect a pullback in share prices, but volatility has been trending down; the VIX has been trading below 30 percent and seems poised to revert to its long-term average.

Source: Bloomberg

Bearing this in mind, last week's recommendations still stand--investors should look to buy into markets in Southeast Asia, as these economies will improve the most from any economic recovery scenario. 

India

President Pratibha Patil's opening address to parliament provided a broad overview of the new government's plan to address a range of pressing socioeconomic issues. Rural infrastructure remains the top focus, followed by health, education, agriculture and small business support. Although the exact details won't be known until the budget comes out in the first week of July, the highlights are fairly easy to sketch.

The new government will implement policies designed to promote prudent fiscal management, encourage foreign investment flows, recapitalize government banks, create a pension regulator as well as land acquisition and rehabilitation laws, introduce a general service tax, and create 13,000MW of new power capacity each year. India is also expected to expand its energy security plans by stepping up oil exploration, improving its coal policy and enhancing its nuclear capabilities.

If India makes even a modicum of progress on these issues, the Indian economy has the potential to surprise dramatically on the upside over the next couple of years. Such an outcome will make the China-India duo the most formidable economic bloc the world has ever seen. Investors should remain positive on India and look for opportunities to get into this market as the country's long-term potential remains solid. I adress these developments in further detail in the the latest update to The Silk Road Investor, "India Revisited."