Horacio Valeiras, CIO

Nicholas-Applegate Capital Management (NACM)

With global stock markets and commodities rebounding by 30% to 80% over the past three months, investors are asking whether the worst is behind us and can we now look forward to a normal economic recovery?

Certainly, authorities worldwide have pulled out all the stops, using monetary and fiscal policies and government balance sheets to thaw the frozen credit markets. Companies have started to raise capital once again, and credit spreads have been reduced by half from the record levels seen in the fourth quarter of 2008.

As a result of all these actions, we have seen stabilization in the rate of economic decline around the world and the large negative growth numbers witnessed in 4Q08 and 1Q09 should not be repeated.

However, unemployment is still rising and will continue to do so for a while, since it is usually a lagging indicator. We would not be surprised to see double-digit unemployment in the next six to 12 months.

Consumer household debt has started to come down, and the savings rate is now over 5%. The de-levering of the American consumer has started, but we believe has a long way to go.

We would prepare for a prolonged period of below-potential growth. Beyond the necessary de-levering, we expect higher tax rates – as we have already seen in the U.K. and proposed in the U.S. – and higher government involvement across the economy, from financial services to health care.

All this, we believe, will be a drag on economic growth. At a time like this, stock picking will be crucial to navigating the turbulent waters.