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Global growth: what to worry about?

The IMF's cautiously optimistic outlook is not without some unrecognised risk.

Cautious optimism from the top down

The IMF’s latest World Economic Outlook1 is cautiously optimistic on the prospects for a gradual global economic growth recovery, following last year’s 2.9% growth rate with a 3.3% in 2020 and 3.4% in 2021. The principal trigger for the downgrade of these forecasts from prior editions is India, who is now into the third year of economic slowdown.

The guarded optimism for the next two years is founded on the expectation that a group of emerging economies return to their longer-term average growth rates, including India, but also counting Brazil, Mexico, Russia and Turkey. The widespread reductions in interest rates that we have seen in 2019 are feeding through now, underpinning much of this optimism.

For investors, this is a relatively good backdrop for global investing and bodes well for returns in 2020, but there are two clearly recognised key risks to bear in mind, and some less generally accepted, but still significant factors, at least for specific regions of the world.

The risks - Some recognised, others not so much

One recognised risk is trade deterioration, especially if the ‘tariff war’ between the US and China continues and spreads further to other countries. The table below demonstrates the extent of the global trade slowdown that took place in 2019. Of the world’s top traders, the US has the lowest trade intensity2, at 32%. The UK for example, has 62% trade intensity, while Korea’s is 76%. Hong Kong of course lives for trade, with a 371% trade intensity. A freeze or de-escalation in the trade war would be very positive for these countries.

2019: A bad year for the world's trade superpowers

Change in global merchandise trade volume Q1-Q3 2018 to Q1-Q3 2019 of world's top ten traders.

Source: Statista and World Economic Forum. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

Meanwhile, looming on the horizon is a potentially very thorny trade negotiation between the US and Europe. The EU has quietly become the world’s most important regulatory body, which ostensibly does not sit well with the current White House. This leadership status is backed by the Union’s position as the biggest consumer market in the world but clearly is going to be a bone of contention for Washington DC.

The other key risk is the scenario whereby the technology sector value chain is further distorted by rising geopolitical tensions between the US and China. That would be very damaging to growth, to investment and to earnings in fairly short order. This is most evident today in technology, but it has ramifications for every supply chain in the global economy.

Companies spent decades designing and calibrating their supply chains to achieve the optimal combination of cost, quality, reliability and synchronisation. Corporate earnings have risen, and consumers have benefitted from these optimised logistics chains. We have now injected a new component, politics, which is tough to quantify and is by definition unstable.

A regionally very significant issue is the final shape of Brexit - it seems more likely now that a ‘hard’ Brexit is a possibility, given all the red lines being put out by both sides. The cost to the economies of the UK and the EU will be significant, but tough to define at this point, given the wide range of potential outcomes. What is clear is that over half the UK’s exports go to the EU and the UK is a highly trade dependent economy.

Finally, climate change is an overriding and still underappreciated global phenomenon that constitutes significant ongoing risk and demands robust policy response, which so far appears to be lacking. This is something that is important, and we at Martin Currie will be researching further in the coming weeks and months.

Footnotes:

1 IMF World Economic Outlook, January 2020. Link

2 Martin Currie and national trade statistics as at 31 December 2019: Trade intensity is a measure of the importance of trade for a country’s economy. The calculation is Imports + Exports, divided by GDP. The numbers are sourced from Martin Currie’s proprietary Country Risk Framework, which feeds data from the relevant country’s trade statistics office.

Definitions:

"Brexit" is a shorthand term referring to the UK vote to exit the European Union.

Emerging markets (EM) are nations with social or business activity in the process of rapid growth and industrialisation. These nations are sometimes also referred to as developing or less developed countries.

The European Union (EU) is an economic and political union established in 1993 by members of the European Community.

The International Monetary Fund (IMF) is an international organisation of various member countries, established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements.

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About Legg Mason

Legg Mason is one of the world’s largest global asset managers, bringing you expertise across equities, fixed income and alternatives. We have nine independent, specialist investment managers, each with their own objective thinking. This means we offer you a choice of strategies and vehicles to help you to diversify your clients’ investments and deliver outcomes that meet their goals.

Martin Currie are active equity specialists. The company builds global, stock-driven portfolios based on fundamental research, devoting all of its resources to delivering optimum investment outcomes and superior client relationships.

 

Kim Catechis, Head of Investment Strategy, Martin Currie (a Legg Mason affiliate)

Kim has 32 years investment experience, spanning developed and emerging market equities. He founded the successful Emerging Markets strategy at Scottish Widows Investment Partnership (SWIP) in 1998.

Kim joined Martin Currie in 2010, to develop the firm’s Emerging Market capabilities performing the role of portfolio manager and sector analyst. Since 2014, Kim has been dedicated to the provision of macroeconomic and political risk research for the Global Emerging Markets strategy.

In 2019, Kim took on the role of Head of Investment Strategy. Alongside his role of providing macroeconomic and political research to the Emerging Markets team, he has responsibility for analysis and insights across global themes and supports our wider investment floor.

He is fluent in Spanish, Portuguese, Greek and French, with intermediate language ability in Russian, German and Italian. Kim has an MBA from the University of Stirling and a BA in French and German language and literature.

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