November 27, 2012 / 3:10 PM / 5 years ago

Investors face severe downside risk into 2013: Citi private bank

LONDON (Reuters) - The balance sheet strength of corporate America is overstated, Europe’s in a mess, China’s “demographics stink” and the best investment opportunities may come from short market upswings, says Citi’s private bank.

The three main pillars of the global economy - the United States, Europe and China - are mired in problems presenting “severe downside risks”, according to Richard Cookson, Chief Investment Officer of Citi’s (C.N) private bank.

The euro zone is still far from resolving its debt crisis and is making a return to growth even more remote by imposing austerity on its troubled economies, Cookson told the Reuters Global Investment Outlook Summit on Tuesday.

“Europe’s a mess and it’s getting worse,” he said.

Prospects in the United States are only slightly better. Progress in deleveraging and paying off private sector debt has been largely achieved through default, which bodes ill for a consumer-led recovery.

Meanwhile, a widely held source of optimism among analysts looking for drivers of recovery - U.S. company balance sheets loaded with cash that will one day be spent on expansion - has been overstated.

“As for all that corporate cash in America, you’ve got to be very careful about that ... there’s a composition question within that,” Cookson said.

Much of the money is held by companies worried about pension liabilities that are rising and exacerbated by low interest rates. That and a desire to protect against future credit crunches such as that seen in 2008-2009 with big cash cushions mean boards are unlikely to authorize a rise in spending.

Investors should not be lulled into a sense of security by strong economic data from China either because official statistics should be taken “with the most massive pinch of salt.”

“Numbers in China are more to do with propaganda than to give you any sense of what is actually happening on the ground,” he said.

Concerns about China include an economy that is not yet consumption based and is still vulnerable to external shocks, evidence of credit bubbles and an ageing population that hits long-term growth potential.

“There’s a whole bunch of signals and if you put them together they always end in trouble,” he said.

    But investors should not be too gloomy as there are opportunities to make canny investments.

    Cookson said certain equities, some European and U.S. corporate debt as well as emerging market bonds, as long as they are denominated in hard currencies, are the best bets in an uncertain world.

    And even if the world economy’s structural issues take years to solve, there could still be short cyclical upswings along the way, he added.

    “You can get huge cyclical upswings. It’s possible you’ll get one next year,” he said.

    “It’s possible you get a cyclical pickup led by the U.S. which drags everything else with it ... and we have a few months where everything is hunky dory. It’s entirely possible.”

    For a graphic on fund flows, asset performance, click on:

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    Editing by Susan Fenton

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