Big investors bet against global recovery

  Despite the recent sharp recovery in the sharemarket, and a long-awaited bounce in the Australian dollar, professional short-sellers continue to dominate the headlines in the financial press.

At present the shorts account for 2 per cent of the total equity of the Top 200 companies listed on Australian Securities Exchange and they’re hanging in there in the hope that the share recovery is only temporary and the retreat will resume with more bad news from our major trading partner China or indications that the US will lift interest rates sooner and thus put pressure on world growth.

Therefore it was interesting to see how the shorts (pessimists) latched onto  last week’s World Economic Outlook report from the IMF. To say it was ambiguous would be generous, but it also gave a clear picture of the challenges facing a various sectors of the global economy, including a commodity-based economy such as Australia’s.

Here’s an edited version of how the IMF saw the situation:

“Six years after the world economy emerged from its broadest and deepest postwar recession, the holy grail of robust and synchronized global expansion remains elusive,” said Maurice Obstfeld, the IMF Economic Counsellor and Director of the Research Department. “Despite considerable differences in country-specific outlooks, the new forecasts mark down expected near-term growth marginally but nearly across the board. Moreover, downside risks to the world economy appear more pronounced than they did just a few months ago,” Obstfeld said. Global real GDP grew at 3.4 percent last year, and is forecast to grow at only 3.1 percent this year. Growth is expected to rebound to 3.6 percent next year. These forecasts reflect a world economy that is at the intersection of at least three powerful forces”

• First, China’s economic transformation—away from export- and investment-led growth and manufacturing, in favor of a greater focus on consumption and services;
• Second, and related, the fall in commodity prices;
• Third, the impending increase in US interest rates, which can have global repercussions and add to current uncertainties.

In this global environment, with the risk of low growth for a long time underlines the need for policymakers to raise actual and potential growth. The disparity between various global growth forecasts is also highlighted : 

Growth in advanced economies is projected to increase modestly to 2 percent this year and 2.2 percent next. This year’s pickup reflects primarily a strengthening of the modest recovery in the euro area and a return to positive growth in Japan, supported by declining oil prices, accommodative monetary policy, and improved financial conditions, and in some cases, currency depreciation. While growth is expected to increase in 2016, especially in North America, medium-term prospects remain subdued, reflecting a combination of lower investment, unfavorable demographics, and weak productivity growth.

Growth prospects in emerging markets and developing economies vary across countries and regions. But the outlook in 2015 is generally weakening, with growth for these economies as a group projected to decline from 4.6 percent in 2014 to 4.0 percent in 2015.

The fifth straight year of slowing growth reflects a combination of factors: weaker growth in oil exporters, a slowdown in China with less reliance on commodity-intensive investment, adjustment in the aftermath of credit and investment booms, and a weaker outlook for exporters of other commodities, including in Latin America, following declines in their export prices.

In addition, geopolitical tensions and domestic strife in a number of countries remain high, with immense economic and social costs. The prospect of rising U.S. interest rates and a stronger dollar has already contributed to higher financing costs for some borrowers, including emerging and developing economies.

And while the growth slowdown in China is so far in line with forecasts, its cross-border repercussions appear larger than previously envisaged, including through weaker commodity prices and reduced imports.

The projected rebound in growth in emerging market and developing economies in 2016 therefore reflects not a general recovery, but mostly a less deep recession or a partial normalisation of conditions in countries in economic distress in 2015 (including Brazil, Russia, and some countries in Latin America and in the Middle East), spillovers from the stronger pickup in activity in advanced economies, and the easing of sanctions on the Islamic Republic of Iran.

Given the distribution of risks to the near-term outlook, global growth is more likely to fall short of expectations than to surprise on the upside. The WEO report outlines important shifts that could stall global recovery.

These include:

* Lower oil and other commodity prices, which although benefiting commodity importers, complicate the outlook for commodity exporters, some of whom already face strained initial conditions (e.g., Russia, Venezuela, Nigeria).

* A sharper-than-expected slowdown in China, if the expected rebalancing toward a more market-based and consumption-driven growth proves more challenging than expected.

* Disruptive asset price shifts and a further increase in financial market volatility could involve a reversal of capital flows in emerging market economies. Further, renewed concerns about China’s growth potential, Greece’s future in the euro area, the impact of sharply lower oil prices, and contagion effects could be sparks for market volatility.

* A further appreciation of the U.S. dollar could pose balance sheet and funding risks for dollar debtors, especially in some emerging market economies, where foreign–currency corporate debt has increased substantially over the past few years.

* Increased geopolitical tensions in Ukraine, the Middle East, or parts of Africa could take a toll on confidence.

All in all a lot more to worry about but really nothing that wasn’t already factored into investors thinking.

CommSec ‘s Craig James was more sanguine in his interpretation of the report:

He pointed out that in recent times had been over-optimistic in its economic forecasting and had been forced to revise on many occasions. But there was no doubt growth had slowed.

But to put the growth rates in context, “the world economy has grown on average by 3.5 per cent over the last 35 years. So growth is OK, but just as the Reserve Bank expresses about Australia, it could be better. The important point is that Australia’s trading partners continue to record solid growth – a point missed by a lot of commentators, but not by the Reserve Bank.”

These markets include South Korea, China, The US, India and Japan.

In regard to Australia, the IMF expects growth to be 2.85 per cent in 2016. If realised, it would be the fastest growth in four years and the second fastest growth in nine years.

Major Contributors to Growth 2016 (pc)

China 1.02

United States 0.70

India 0.23

United Kingdom 0.09

Germany 0.07

Korea 0.06

Japan 0.06

France 0.05

Australia 0.05          

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