● The stock market may be nudging higher. But there was more gloom this week from the International Monetary Fund (IMF). A leaked report showed the IMF has slashed its forecasts: it now reckons the eurozone will only grow by 0.5% instead of the 1.1% it had expected before.
The UK won’t fare much better, says the IMF, limping along with just 0.7% growth. Meanwhile the US will lead the pack, but will only expand by 1.8%. All in all, it looks like a grim year ahead for mature economies.
But emerging market bulls should also be worried, says Merryn Somerset Webb. In a separate report the World Bank warned that an “escalation of the crisis” in the eurozone “would spare no one”. As a result it has lowered its forecast for emerging market growth in 2012 from 6.2% to 5.4%.
One reason for this cut is that, despite the claims of emerging market cheerleaders, “the East has in no way yet decoupled from the West”, says Merryn. “China may want consumption to drive its growth, but the empty shopping malls and unsold apartment blocks across the country tell a clear story of investment running way ahead of demand.”
● Another problem is that the “emerging market boom was a product of the credit bubble too”, says Merryn. “The importance of credit to the growth of all the emerging market economies has surged in the past decade or so. These cycles have been driven in part by domestic lending, but also by huge foreign inflows, which in turn were driven by loose monetary policies in the US, UK and Japan.”
That means emerging economies stand to lose out as credit becomes more constrained. Another factor will be a “more assertive US dollar”, says Merryn quoting SLJ Partners. “The dollar isn’t expensive anymore (the fundamentals may not have improved, but remember that currencies are all relative). Any cyclical turndown in emerging markets, “even if China avoids a hard landing”, could lead “to a powerful rally in the dollar” against most emerging market currencies.
Merryn’s advice? It is time to take profits from the emerging markets trade and reinvest in dollar assets or gold. And if you want to learn more about the likely impact of a Chinese slowdown, we cover it in this week’s magazine. Subscribers can read it here: Brace yourself: China is heading for a hard landing. If you’re not already a subscriber, subscribe to MoneyWeek magazine.
● Normally, the first place to show signs of falling global growth is the oil market. But prices have remained high. That provides a big opportunity for investors, says John Stepek in Thursday’s Money Morning.
Don’t be fooled by prices over $100 a barrel, says John. Demand for crude is falling. “Oil consumption fell during the fourth quarter of 2011, for the first time since 2009, according to the International Energy Agency. And the IEA reckons it’s possible that demand won’t grow at all next year.”
So what’s keeping oil prices up? The Middle East, of course. “You can’t talk about oil without mentioning the Middle East,” says John. “The big, obvious threat to oil this year is the ongoing sabre-rattling over Iran”. But “most of the time, any such disruptions are temporary.”
Another factor driving prices has been comments by Saudi oil minister Ali al-Naimi. The press has been full of quotes that he wants to keep the price at $100 a barrel.
But that’s not quite the whole story, says John. “For a start, he was speaking when oil was above $100 a barrel. And in the same speech, he talks of how easy it would be to increase supply rapidly if needed – hinting, in other words, that they could make prices fall, not threatening to push them higher”.
“The Saudis may be happy with a generally higher oil price. But the last thing they want is a price spike that sends the global economy back into recession.”
Meanwhile, oil fundamentals don’t look too healthy. The IEA reckons US oil demand is likely to fall to a 15-year low. “Americans might start using more oil if petrol (‘gasoline’) prices fall. But chances are that after several years of having to cope with high prices, they’ve changed their habits for good.” And “a harder landing for China – which is what we suspect will happen – could see demand slow even further”.
As a result, we think the oil price is likely to fall. There are a couple of ways you could try to play this. One is spread betting. Be warned, it is not simple, especially in a volatile market like oil. If you want to learn more about spread betting, sign up for our free email, MoneyWeek Trader.
There are also exchange-traded funds that allow you to play falling oil prices – Don’t be fooled by prices over $100 a barrel.
● This week we’ve seen a war of words on the national deficit, says Merryn – within the Labour Party. While Ed Balls accepts that some cuts may be necessary, Ed Miliband largely doesn’t.
“He still doesn’t think the last Labour government spent too much. And he still only supports one of the ‘cuts’ made so far – the curbs on public sector pay (which aren’t, of course, cuts, just limits to rises). He still doesn’t appear to think that debt is a problem. He still doesn’t get it.”
That’s dangerous because the UK’s debt problem could flare up at any time, says Merryn. “Our politicians might like to say that the UK, with its record-low gilt-yields, is something of a safe haven. But let’s not forget that UK gilt-yields are low for the same real reason as US yields are low: we are printing money to roll over our debt.”
By the time UK national debt peaks it will be £1,500bn. That’s three times what it was in 2008 and eight times larger than in 2000. Moreover that £1.5 trillion figure is based on the assumption we have a bit of economic growth, and implement the austerity package in full. Neither is a certainty.
“Right now, the markets are distracted from our hideous fiscal position by the eurozone. But when they turn to look at us again, why would they think that we could honour £1,500bn worth of debt?“
● Judging by your responses, it’s a topic that interests readers.
‘AC’ noted that “even if the population hit 70m, the £1.5 trillion would still equate to over £20,000 to pay off per person throughout the country”. AC’s solution would be to “allocate each child born a £25,000 debt, charge them interest linked to inflation, and take away a % of earnings over a threshold until retirement? Would at least be a bit more transparent who we’re expecting to screw over to sort out the debt!”
Meanwhile Roberto Birquet notes that the UK’s position is even worse when you factor in consumer debt. If you haven’t read the piece yet click here to have your say.
Before I go, I’d like to give you a heads up about one of my colleagues, Tim Price. Tim is an investment manager who handles more than £1billion of his clients’ money. Luckily for us he’s also our square-mile insider, writing a weekly investment report. At the moment Tim is worried. He thinks 2012 is going to be a dangerous year for investors and has identified three major threats to your wealth. No surprises for guessing the first – Europe.
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Have a great weekend!
• MoneyWeek
• Merryn Somerset Webb
• John Stepek
• Tim Bennett
• James McKeigue
• David Stevenson
• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .