Joy Bolli: Giles, will the 1.1 trillion dollar aid package pledged by the G-20 actually make a difference to the world economy?

Giles  Keating: What the G-20 has done is one more important building block in helping to create a base and eventually allow recovery. The main bit of new information in the G-20 was the aid to emerging markets mainly via the International Monetary Fund (IMF), and that was very genuine help. Over a period of months, that will take away the risk that some of the emerging markets could have gotten into really deep trouble. The G-20 is an important symbol. But many of the actual measures had been announced before. It's putting all of those things together that really matters.

What impact do you expect this aid package to have on the financial systems?

In the very short term we have already seen a mildly positive reaction. If we look further ahead, the important point again is underpinning those weak emerging markets and also sending a signal that the major countries are working together rather than fighting. The question is: Can they stick with that – most particularly in the area of protectionism? If they manage to prevent backsliding there, that will be good. But we are watching closely, because there have already been one or two small measures that go the wrong way.

Can you give us an example?

In total 17 of the G-20 countries have carried out protectionist measures - restrictions on exports from other countries and this sort of thing – none of them very big so far. And if that's all it is, then we're okay. But the danger is that it gets bigger. 

Central banks have been slashing their rates. What happens as their scope moves towards zero?

The two that are now really at that point are the US Federal Reserve (Fed) and the Bank of Japan. What they've already started doing is so-called quantitative easing, which is where they start buying longer dated bonds. The aim is to try to bring down longer dated interest rates, as well as operating at the very short end of the yield curve, which is where central banks normally operate. That has had some effect, although rates have gone up and down. And personally I think: The effect is helpful, but it's not going to be overwhelming.

We frequently see slight rallies. How can central banks identify the right moment of stable recovery in order to take liquidity from the markets?

I think this is one of those 64,000-dollar questions. If I Iook back over the last 10 years, the history is that the central banks haven‘t been withdrawing liquidity quickly enough. Basically, the Fed kept the liquidity pumps going too long and created, for example, the housing bubble, which led to all these problems. This time around, I am afraid the problem is that they won't withdraw this liquidity quickly enough, because they'll want to try to make sure that the economic recovery is in place. If I actually look one or two years ahead, we could see a new bubble in some asset prices, like perhaps in emerging market equities.

The first quarter is just over. Will first-quarter corporate earnings generally keep weakening?

The good news is that markets now are so pessimistic. They're now expecting something like a 36 percent decline in US corporate earnings for the first quarter. As recently as at the start of this year they were only looking for 12 percent decline and before that they were looking for a rise. So, because there's so much bad news in the market, the risks are much more evenly balanced. For example: If earnings turn out falling only 25 percent that will be better than expectations. And I think there's a reasonable chance that that's the way things will go. Although it should be said: At the time we're making this video, we've just begun the earnings season and the first result (issued by Alcoa on April 7) has been a bit of a disappointment.

Are there some sectors which are exempted from this slowdown, and already picking up?

There are definitely some sectors which have been able to pick up. For example, banks saw a good rally during March and early April. But that was more because the prices had fallen so far that people felt that things had been overdone. And in the way of markets having rallied we're now seeing a small setback. Another perhaps very important area is, if I look at stocks related to China where it clearly does seem that economy is going to pull itself out of these problems more quickly than others. And there we've already seen a very good recovery, and we can get more of that. I would advise people to buy on dips: technology and ITcompanies. We've had a bit of a rally. I think we can get more. So, yes, there are some bright spots here.

The equity market has generally been rising since March. Is this a typical bear market rally?

I think the way my colleagues and I would like to think of it is that in an erratic way, we can actually continue to see some further gains. But there is definitely a risk of perhaps quite a big further setback, perhaps sometime as we move toward the middle of the year. Now, will that take us right back down to previous lows or even lower? We can't be sure. But on balanced probabilities probably not. I think the risk of the world economy really going into depression is less than it was, because of all the policy measures.

How is the situation on the currency markets?

We think the dollar is now really well in the process of making a top. And so, we're really advising people to step up their hedging activity and their withdrawal from dollar exposure. It has been supported by a number of temporary financial flows, but we think those temporary flows are really coming to an end and the more adverse underlying fundamentals will tend to dominate in coming months.

Some investors seem to be moving into safe haven investments such as gold. Is this the right strategy?

Gold does play a part in private investor portfolios. However, we think the entry point is very important, and we've really been stressing to people to try to enter that market significantly below the 900 dollars level, perhaps somewhere around 850 dollars. We wouldn't be advising people to jump into gold when it's trading somewhere close to 1,000 dollars. We think the risk reward just doesn't really justify it.

How about the bond markets?

Well the credit markets have seen some degree of improvement. We think that there can be further improvements. But we would really stick – certainly for private investors – to recommending that they focus on quality bonds with short to medium- term maturities. Longer dated bonds, we think, are ultimately vulnerable to all the adverse effects from the high liquidity that's being poured in. There are probably some opportunities opening up in lower quality bonds, including some distressed bonds, but we think that remains a very risky area.