April 22 2022
This week saw the release of the latest economic growth projections by the IMF. Within this they forecast that the global economy will grow by 3.6% this year. This is 0.8% lower than the prediction which they made in January. Even following this reduction the IMF warn that uncertainty around this forecast is high. They believe that downside risks continue to dominate, including:
i. Possible worsening of the Ukraine conflict.
ii. Escalation of the sanctions on Russia.
iii. Sharper than anticipated deceleration in China due to COVID.
iv. A renewed flare up of the pandemic.
Advanced economies saw the biggest downgrade to their prospects, with growth expected at 3.3%, 0.6% lower than previous forecasts. Big losers here were Europe, in particular Germany and Italy, with the UK not far behind. The UK however is still forecast to have one of the strongest growing economies, with forecast growth of 3.7%, on a par with the US. Emerging and Developing market economies are forecast to grow 3.8% on aggregate, 1% lower than previously thought. Within this group however there was significant dispersion. The Russian economy is now forecast to contract by 8.5% this year, a -11.3% reversal. Conversely, the Saudi Arabian economy saw a 2.8% uplift to 7.6% projected growth.
We are certainly starting to see signs that the consumer is starting to struggle due to the higher levels of inflation and cost of living. In the UK, research from Gavekal and Macrobond suggests that we could see the largest fall in real disposable income on record. Consumer confidence meanwhile is in freefall and is only one point above the record low seen in the GfK measure back in 2008/9.
In China the Omicron variant and the zero tolerance policy of the authorities is taking its toll. We have a jam of ships waiting off the Port of Shanghai to load or discharge, with container numbers ever increasing on the dockside. The number of ships waiting is significantly greater than last year’s peak.
A further sign of the slowdown in China can be seen in the Shanghai subway passenger volumes, which are lower now than they were in 2020 as the public stays at home. Whilst the Chinese authorities have suggested that they will step in to help those Chinese companies affected, it looks like there will be no relenting in the zero tolerance policy to COVID in China anytime soon. Meanwhile, these issues do not help the difficult supply/demand dynamics which we already have in terms of global trade.
It was Netflix however who stole the headlines last week, with the company turning from poster child to bottom of the class in terms of streaming companies. The company reported that they lost subscribers during the first quarter when they were expected to have added. The offering of alternative streaming services will have undoubtedly contributed. You could also argue that future growth was brought forward because of the pandemic, but the fact that consumers are starting to feel the pinch in their pockets will undoubtedly have also been a factor. The result was a fall of 35% in their share price on Wednesday, knocking $ 50bn of the company’s value. The share price has now fallen almost 70% from its November 2021 high. Perhaps it could be argued that the share price and valuation of the company had got a little ahead of itself!
The value of this investment can fall as well as rise and investors may get back less than they originally invested. Past performance is not necessarily a guide to future performance. The Fund is suitable for investors who are seeking to achieve long term capital growth.
The tax treatment of investments depends on the individual circumstances of each client and may be subject to change in the future. The above is in relation to a UK domiciled investor only and would be different for those domiciled outside the UK. We strongly suggest you seek independent tax advice prior to taking any course of action.