• The world economy is undergoing profound changes

• The balance of power is shifting from the West to the East

• Those with financial clout, natural resources, and flexibility to adapt will grow stronger and win

• The world economy needs to be more balanced

• But savers are not to be blamed

• Instead, they are part of the solution

• The rise of China and India, along with other emerging economies, needs to be better appreciated and understood

• They pose serious challenges and opportunities to the West

• To grow stronger from the crisis, one needs to live up to these challenges, adapt and change

• UK, like the US and others, needs to reinvent itself

• While the challenges are serious, we are optimistic

• Plus focuses on Asia, Middle East, FX, and Commodities, and highlights on China, Eurozone, Japan, Nigeria, Thailand, and the US

Synopsis

The winning formula

Overview: Look east
A profound change is underway in the world economy. The balance of economic and financial power is shifting from the West to the East. This shift could usher in a super cycle of strong sustained growth for those economies best positioned to succeed. The successful countries will be those with financial clout, natural resources or the ability to adapt and change with the times. Whether the UK can position itself in this category is one of our biggest challenges.

Asia: Rebalancing slowly with the US
In Q1-2009, Asia as a whole is still accumulating foreign-exchange reserves. This suggests that the long-awaited rebalancing of Asian economies has yet to take place. However, there is evidence that an adjustment in the relative current account positions of the US and Asia is quietly underway.

Middle East: The GCC (not so) common currency
The UAE's decision to leave the GCC common currency is not surprising. With UAE and Oman out, there is no longer a common currency. But this is unlikely to change the decision to locate the central bank in Riyadh, and political cooperation among the GCC countries should continue nonetheless.

FX: From hysteria to euphoria
Euphoria over avoiding the worst case scenario has gripped the markets. Many markets have moved to far too fast, though not yet in FX. Bullishness towards AXJ currencies is resilient despite politics and intervention. The industrial cycle has bottomed and long-term fundamentals are in focus. Emerging European FX may, in general, remain choppy for longer.

Commodities: Demand, investors, and the dollar
Rally driven by bottoming of growth expectations and a weaker USD. Some retracement is likely, followed by a more sustainable rally in H2. Crude oil forecasts raised to reflect faster-than-anticipated improvement in sentiment. We expect gold to continue to grind higher. In agriculture, the current rally is overdone, but we expect corn and wheat to outperform.

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