Actually the reports of the IMF on the outlook for the global economy are useless. It happens because nobody knows what exactly the future will bring. But they do provide a picture of the current consensus in the market. A reflection of our fears and wishes.
The new IMF chief economist Gita Gopinath concluded in the report that global growth is faltering. The slowing is surprising and Gopinath spent the necessary words on the risks attached to the outlook. These risks are not so much economic or financial, but mainly political. Business tensions, Italian politics, Brexit and the shutdown of the American government were all cited by them as potential sources that could further weaken the economy.
The unknown unknowns
How these risks will develop in the coming months, nobody knows. And does the stock market give the investor sufficient compensation to take on these risks? In itself, it is encouraging if market players focus on the ‘worst-case scenarios’ of cases with a double unknown: the unknown outcome and the unknown influence of that outcome on the financial system.
What we do know is that since the beginning of 2018 the MSCI All Country World Index has increased by 1.5% to 7.5%. The risks that the IMF is talking about are already included in the prices. Investors are served with a theoretical plus of 1.5%. In some markets, such as Japanese, we get 2.5% more than a year ago and the cheapest valuations since halfway through the euro crisis.
Recovery is still possible
IMF president Christine Lagarde waved a warning finger towards political bodies. She told them to put things in order, show themselves resiliently, embrace an inclusive society and increase cross-border cooperation. If they actually do this, there will be more recovery for the equity markets, more than we have seen in January. The sentiment that now prevails is not yet supported by the underlying developments that suggest a structural slowdown in growth: many labor markets are still becoming stronger and inflation expectations are favourable.
This can of course worsen, but we are still more than compensated for the risks, also in parts of the bond market. Should the uncertainty surrounding political problems weaken, a more positive sentiment could boost returns.
The IMF has no influence on this with all its well-intended predictions.