Three things concerning the globe’s top financial minds
The key areas of discussion at the most recent International Monetary Fund-World Bank Meetings.
1. China’s economy
Chinese economic data has disappointed this year. Recent episodes have led to increased speculation about whether China would at some point in coming years suffer a sharper slowdown as it confronts its many policy challenges. However, there are reasons for optimism that risks regarding China may be receding:
- Policy stimulus has stepped up with most recently a sales tax cut for small cars and another reduction in the required deposit ratio for first home buyers.
- Average home prices are now rising suggesting the risk of a property crash is rapidly fading.
- Recent business conditions PMIs have shown signs of stabilisation and consumer confidence has risen to its highest since May last year. Growth in the September quarter looks likely to have slipped below the 7% level, but the next few months are likely to see confidence improve that Chinese growth is under control.
- Chinese mainland shares are trading on a forward price to earnings multiple of 11.2 times and Chinese companies listed in Hong Kong are trading on less than seven times making them very cheap.
- September data on China’s foreign exchange reserves indicate capital outflows have slowed and hence worries about a crash in the Renminbi are receding.
2. Slowing emerging-market growth and the effect on developed markets
Slowing growth in emerging markets has been a big theme lately, and it was no different at the meetings in Lima. Growth in the emerging world has already slowed significantly.
Business conditions PMIs in emerging markets are weaker than in developed markets.
Bloomberg, AMP Capital
In 2011 emerging countries grew 6.2%, whereas this year it’s likely to be around 4%. Brazil and Russia are in recession. A lot of bad news has already been factored in for emerging markets with forward price-to-earnings multiples around 10 times (compared to around 14 in Australia) and a 40% fall in their currencies.
While valuations are good and extremely negative sentiment towards them is a positive, their economic cycle and liquidity backdrop (reflecting high interest rates in some countries) is a cause for concern .Since growth in emerging markets has been a driver of world gross domestic product since the financial crisis, the main thing to watch for is whether they start to drag down growth in advanced countries.
3. Commodities, exchange rates and capital flows
Commodity prices are down 50-70% from their highs several years ago. With the supply of commodities still rising, the secular decline in commodity prices may have further to run. However, the bulk of the price damage is likely behind us and they are due for a cyclical bounce.
As China devalued its currency and talk of so-called currency wars has emerged, exchange rates were bound to come up. There was less concern about the potential negative effects of exchange rate volatility. Rather, there’s a widely shared sense that international capital flows are a source of vulnerability for the world economy and some individual countries. Many participants thought that China would be well advised to prioritise the correction of major domestic imbalances before attempting further capital account liberalisation.
Final thoughts
There is plenty to keep an eye on with challenging global conditions presenting downside risk. However, our broad assessment remains that the cyclical bull market in shares is likely to reassert itself in the seasonally strong months into year-end.
About the annual meetings
The annual International Monetary Fund (IMF) -World Bank (WB) meetings bring together WB and IMF Governors, civil society representatives, local and international journalists, and members of the global academic community, among others. The meetings are held annually to promote dialogue on current issues that are of relevance to the world economy, financial stability, and economic development.