IMF-WB annual meetings: key takeaways.

global perspectives

IMF-WB annual meetings: key takeaways.

Salman Ahmed, PhD - Chief Investment Strategist

Salman Ahmed, PhD

Chief Investment Strategist

The Annual Meetings of the International Monetary Fund and World Bank Group took place October 12-14 in Bali this year. The general mood was cautious, with attendees focused on the ongoing US/China trade war, Federal Reserve tightening, Italy, and state of the global cycle. In terms of specific countries, there was strong interest in Turkey, Brazil, India, Indonesia and Italy.

The IMF has downgraded its global growth forecasts and the most recent global financial stability report contained several warnings, especially around the potential damage coming from the escalating trade war between the world’s two largest economies.  

Below are a number of the key messages from the summit:  

1.

US/China Relationship – The issues between the US and China are believed to run deeper than trade. So far, China has kept the retaliation to trade issues, but the US focus is widening to include non-trade areas as well. Interestingly, many well-informed commentators indicated that China currently has no source of support in Washington. Republicans, Democrats, the White House and even the multi nationals are now all starting to use a similar anti-China narrative.

A recent speech by Vice President Mike Pence was seen as evidence that US politicians are increasingly suspicious of China and it is unlikely that mid-term elections will change the underlying dynamics of Capitol Hill. During the Obama era, China had support in Washington when it came to several multi-lateral engagements, including the Paris deal and on Iran, but all these initiatives have been reversed by the Trump administration. A complete lack of support in Washington could be interpreted as a failure of Chinese diplomacy.

a.

Speakers highlighted that China is ruled by pragmatists and there is a  interdependence when it comes to the US and China, especially when it comes to supply chains. This can be seen as an important back stop for much worse outcomes. President Trump, interestingly, is seen as the main pillar of potential future support for China, given his penchant for theatrics, which a Xi-led China could leverage. The upcoming G20 meeting in November, and key events in China in December, are entry points for a potential resumption of the dialogue, which may lead to a slowdown of the escalation we have seen in recent weeks.

b.

The underlying issues that have been laid bare by this escalation are unlikely to go away anytime soon. Specifically, China’s rise in AI,  intellectual property theft, limited foreign access to China, as well as more long-term,  genuine fears about China’s rise threatening the US-led global order. China’s policy representatives have revealed a greater tolerance for slower growth, as less than 6% is now seen as more acceptable in the long-run, in my view. The top goal of the Xi administration remains employment stability, which a targeted policy stimulus will help to maintain.

2. Yuan – There was a lot of discussion around what is happening to the Chinese yuan. The general consensus seems to be that its movement is a product of market forces as China engages in easing in response to the trade dispute with the US. There are concerns that the US administration will not see it that way and there are also internal challenges for China, given a depreciation of the currency leads to escalating capital outflows.  The People’s Bank of China (PBoC) governor Yi Gang gave a speech which emphasised that China doesn’t intend to use the currency as a tool in the trade war, but the balancing act will be delicate as China faces the well-known policy tri-lemma (you can’t have a fixed exchange rate, independent monetary policy and run an open capital account).  Long-term downward pressure is expected to continue on the yuan, but there may be some respite in the short term as expectations are re-anchored.
3.

US cycle/Fed tightening – The US cycle is viewed as strong and it is currently powered by fiscal stimulus. Fed tightening is expected to occur at a rate of one hike a quarter. There are concerns regarding the potential for a slowdown next year amid a variety of risk factors.

4.

Italy – Italian government representatives shared the view that policy adjustments are needed to offset the prolonged period of slow growth. Investors appeared suspicious about the multiplier effects and growth assumptions built into the projections, which were on the generous side. Market pressure does not appear to have provoked a massive shift in the thinking of the government and the current draft has now been presented to the European commission. The exercise may prove self-defeating as any rise in yields is likely to offset the growth stimulus planned from the expanded fiscal deficit.

5. Turkey – The government has introduced a number of policy steps following the currency crisis in August and these have been largely viewed as positive. The main takeaway was that Turkey is looking to ease tensions with the US, as evidenced by the release of Pastor Brunson. The cleaner public balance sheet is a good sign, but the deterioration in the quality of policy makers at the helm is clearly evident.
6. India – Growth remains strong, but macro conditions have deteriorated and rise in oil prices has not helped. Policy makers still managed to sound quite confident, especially on non-performing loan (NPLs) in the shadow-banking sector, which is seen as a case of liquidity mismatching rather than an asset quality issue.  
7. Brazil/Argentina – Presidential candidate Jair Bolsonaro is expected to win the second round vote later this month, but Brazil’s weak public balance sheet remains a concern from a strategic perspective. Markets are likely to remain supported as political uncertainty wanes in the short-term.
a.

Argentina is seen as a positive valuation story, though a deep recession lies ahead, which has potential implications for the presidential election next year. There was a strong sense of commitment from the government officials present on the subject of using orthodox policy to offset market pressure.

8. Emerging Market (EM) asset class views –The recent extreme cycles of ‘famine’ and ‘feast’ have dented confidence when it comes to EM’s role as a strategic block, especially for developed market (DM) investors. That said, EM has outperformed DM in the returns space, both in fixed income and equities, since their inception to key indices.
  a.

Mainstreaming of EM as China’s role increases in main indices was highlighted. In addition, playing heterogeneity in countries, sectors and company space is seen as a source of alpha, which is likely to strengthen going forward.

  b.

EM FX’s role appears to have shifted towards more policy tool application, rather than just a pure asset class. Moreover, increasing diversification power of hard currency credit was also discussed when it comes to strategic allocations. 

9. ECB/BOJ – There was not a great deal of discussion given over to the subject of the European Central Bank (ECB) and Bank of Japan (BoJ).  The BoJ was viewed as holding the course, with the VAT hike planned for October next year representing a key domestic development with potential policy implications. The situation would need to deteriorate far more for ECB policy shift to come back into play. There are early discussions about change of personnel next year, but there is still no clear front-runner yet to replace current President Mario Draghi.

 

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