The IMF reduced their forecasts again yesterday for the second time since April, citing, not unsurprisingly, the U.S. fiscal cliff and Europe’s debt crisis as being the top issues for the global economy. The IMF pegged back the world growth outlook to around 3.3% – back to 2009 levels with a contraction in the euro economy being the principal drag on growth.
No real surprises here though. So China, India, and Brazil are to slow – this is not a surprise to investors, or shouldn’t be, with plenty of cooling noises emanating out of China in particular in recent months.
We agree with the argument that Europe will take years to recover in terms of economic growth reverting to normalized levels. However, the European stock markets have already discounted this with CAPE (Cyclically Adjusted PE) ratio’s in Spain, Italy, Portugal and Europe’s basket case – Greece – all near generational lows. What’s intriguing to us is the fact that the S&P500 and Dow are reaching near record highs. Of course, the primary answer is Me Bernanke and his magical money creation machine. For investors with a 1 year + horizon, we doubt that the US will be still leading the pack with China, Southern Europe and Japan likely to be heading the returns tables.
Another interesting snippet from the IMF growth revisions is that they still anticipate “emerging markets to grow four times as fast as advanced economies” and while reducing expectations for China in 2012 and 2013, the IMF warned against being overly pessimistic about the prospects of these economies, which were major engines of growth in the global financial crisis. IMF Chief Economist Olivier Blanchard said at a briefing “Let me be clear. We do not see these developments as signs of a hard landing in any of these countries”
These statements support our postulations that China and also Japan offer exceptional value at these levels and, when weighing up the downside v upside potential the odds are now skewed heavily in the bulls favour. In China’s case the equity market has have severely underperformed international equity benchmarks for the past four years.
I we and the IMF are right on the soft landing scenario, then we may well have seen the low points for many of the larger resource stocks, with all the iron ore producers now well above their low point of a month ago. The sector showed signs of capitulation when iron ore prices got down to around $85 a tonne.
Time will tell, but if we are right in our view that China is in for a better than expected landing, then commodity prices during the current corrective phase may well have also seen their lows. Commodities such as copper and energy are already looking much better in terms of their respective price action. These two commodities may well prove to be the lead sled dogs for the wider commodity complex.Commodities are real assets that will always appreciate during timesof currency abasement. And those times are upon the global financial system at present. We stick with our picks in BUMI, ENRC, Lonmin and Vedanta.