IMF piles pressure on G20 as it cuts forecasts again

800px-g20_svg

A failure by the G20 summit on 2 April to tackle the global recession will lead to an even more prolonged downturn, the International Monetary Fund warned yesterday, as it slashed its forecasts for growth.

The IMF’s latest bulletin warned: “Delays in implementing comprehensive polices to stabilise financial conditions would result in a further intensification of negative feedback… leading to an even longer and deeper recession”. Stimulus packages would also need to be maintained in 2010, the IMF said.

The fund also issued a stark warning that the collapse of some national economies in central and eastern Europe could still trigger another wave of banking failures.

The IMF’s note, prepared for the G20, warns of a sort of domino effect running through the continent via the banking system as problems in nations such as Hungary, Romania, Bulgaria and the Baltic states knock down otherwise relatively healthy advanced economies – including those in Sweden, Austria, Switzerland, Belgium and the Netherlands.

That, in turn, could trigger a further international panic like the one seen on global stock markets last October.

The UK is among those especially exposed to further weakness in property markets, the IMF warned. “Falling home prices and rising defaults in the United States, United Kingdom and parts of the euro area are already exacerbating strains in the financial system,” it said. “Mounting lay-offs would further dampen consumption and residential investment.”

The Bank of England policy of “quantitative easing” is endorsed by the IMF, which is encouraging the G20 countries to adopt “unconventional measures” to unlock “key credit markets”.

Differences on the timing of future stimulus packages have emerged as one of the important obstacles to a stronger international response to the crisis. Despite urging by the US and Britain, the German government and others in the EU have resisted pressure to introduce fresh packages quickly. The IMF suggests all nations implement a fiscal boost of around 2 per cent of GDP, which would create more than 19 million jobs globally.

The “bad-bank” model much talked about in recent months is also strongly endorsed by the IMF, which adds a note of urgency to the debate. “Policymakers must resolve urgently balance-sheet uncertainty by dealing aggressively with distressed assets and recapitalising viable institutions.”

The IMF said that it now expects the world economy to contract for the first time since the Second World War, by between 0.5 and 1 per cent, with the advanced economies leading the charge downward: they will see a slump of around 3 to 3.5 per cent – a “deep recession”. The most shocking figure is the one published for Japan – a slump of 5.8 per cent in 2009, with a further decline of 0.2 per cent in 2010.

A few days ago, the IMF said that the UK would slide by 3.8 per cent this year with a further shrinkage of 0.2 per cent in 2010. The equivalent figures for the US are -2.6 per cent and 0.2 per cent, and for the eurozone -3.2 per cent and 0.1 per cent.

The emerging and developing economies will still grow, however. The IMF concludes that “the prolonged financial crisis has battered global economic activity beyond what was previously anticipated”.

The possibility that the fresh twist to the international crisis could come from eastern and central Europe is made explicitly clear by the fund. Former Communist bloc states such as Romania, Bulgaria, Estonia, Latvia, Lithuania, Hungary and Croatia have relied heavily on flows of private finance to fund their large trade deficits and investment in their fast-growing economies. That finance is now starting to evaporate, with resulting intense pressure on national currencies.

The exposure of Austrian, Swiss and other Western financial instructions to these nations could threaten their own stability, the IMF said. It added: “Emerging economies should prepare, on a contingent basis, plans to address the growing risk of large-scale corporate failures… countries should assess their preparedness for dealing with possible bank runs.”

Advertisements

World of opportunity for adventurous investors

It’s terrible out there in the big bad world but fortune favours the brave and, if you’re prepared to take a risk, the returns could be huge. We look at the options

Wall Street

Some analysts believe the US will lead us out of recession. Photograph: EPA

The US

The US led us into this recession – and the US will now lead us out. That’s the view from Neptune Investment Management, which is convinced America is the most attractive market for investors anywhere in the world, writes Patrick Collinson.

Neptune, a boutique asset management firm that has grown rapidly in recent years, runs the best-performing North American fund available to UK small investors. Its US Opportunities fund is top-ranked out of 76 unit trusts over three years – although that means it has merely fallen by 1% rather than the 50%-plus at some rival US funds.

It is managed by Felix Wintle, who reckons the dollar will remain firm and that the US economy will bounce back. The Dow Jones stocks average has halved in only 10 months, from 13,058 in May last year to below 7,000 in recent days and bargains abound, Wintle says. “You’ve got to look at the context of how far we’ve fallen. Markets will recover when sentiment is at its worse.”

Wintle is not about to ring the bell signalling the bottom of the market, but evidently believes we may be near the point of “maximum capitulation”.Many UK investors will be cautious about buying dollar assets, given how far sterling has fallen against the greenback. Surely any gains that might be made from the US will be swiftly wiped out by a sterling revival? Wintle thinks not. “Sterling is structurally compromised against the dollar, because the UK economy is so moribund,” he says.

But scanning the figures coming out of the US economy, it’s looking pretty moribund across the pond too. Economic output slumped at an annualised rate of 6.2% in the last quarter of 2008, and unemployment rose above 8% last month. But Americans, optimists by nature, are clinging to the belief that the US will be the first out of this recession.

What will be the catalyst that sparks a recovery? The answer, according to Wintle, is “when things are getting bad less quickly”. And the pointer he is looking for is when house prices stop falling. He has already started buying some “super-early cycle housebuilders” such as Pulte, a major American construction company.

Pulte was trading at $46 a share in mid-2005, but is now around $8. It plunged throughout 2006 and 2007, but stabilised in 2008. Back in 2006 it was telling us that a major crack in the US residential market was happening, but we chose to ignore it. The fact that it now defies the continued flow of bad news may be telling us that the worst is now over, according to Wintle.

Wall Street rallied strongly early this week, with a glimmer of optimism from that most unlikely of places – a bank. Citigroup reported that in January and February it moved back into profit, sparking a 379-point gain in the Dow. But economists are still bearish on the short-term outlook for the US.

Bruce Brittles of RW Baird, one of the top investment strategists, says the recovery that only a matter of weeks ago he thought might begin late this year is not likely to start until 2010. And don’t expect it to be vibrant – with GDP expansion of little more than 1%.

But in every other recession, the stockmarket has tended to recover between six and 12 months before the economy. Brittles reckons stockmarket sentiment is “bearish to extreme”, that we are in a “severe recession”, and that unemployment is exploding.

But commodity prices (particularly agricultural products grown in the US) are firm, and, unlike in the early 1930s, money supply is growing. Inflation won’t be a problem through 2009 and 2010, even if it becomes one later, and indicators from the futures market suggest there is the potential for a sustainable rally in equities.

Ahead of any upturn, Wintle is holding stocks he thinks will benefit from the recession – particularly down-market retailers that are enjoying a boom as hard-pressed consumers trade down. He holds Wal-Mart, Family Dollar and Dollar Tree.

The latter two companies are the closest equivalent in the US to companies such as Poundland and Poundstretcher in the UK. Family Dollar has jumped from $18 a share to as high as $32 over the past year, and Dollar Tree from $25 to $44.

But it is probably the healthcare sector – biotech in particular – where Wintle is most excited about opportunities. “It is definitely the most attractive part of the market at the moment,” he says.

How to invest: Minimum in most US funds is around £1,000 as a lump sum or £50 a month. Top-performing funds are Neptune US Opportunities, GAM North American, Jupiter North American, Newton American and Scottish Widows American Select Growth. Avoid initial charges of 5%-6% by buying via a discount broker. Try h-l.co.uk or chelseafs.co.uk. Or go to a fund supermarket such as fundsnetwork.co.uk (run by Fidelity). It will discount most initial charges to 0%-1.25%.

• Patrick Collinson was a guest of Neptune Investment Management on a trip to Chicago

Gold

Gold bars Photograph: Tom Schierlitz/Getty Gold could surge to $2,500 an ounce over the next five years as investors pile into the traditional safe haven from inflation. So says Swiss bank UBS, which this week told its wealthy clients to increase their holdings, largely as a bet against the devaluation of paper currencies as governments around the world crank up the printing presses.

“Given the broad uncertainties in the current macro climate we believe investors should look to gold, with its historic tendency to act as a hedge,” the bank said. The metal was this week at around $900. If the bank is right investors will almost treble their money.

It is surprising how little the gold price has reacted to the perilous economic news over the past year. This time last year, it briefly topped $1,000 then fell back. British investors have done relatively well because sterling has fallen against the dollar, in which gold is priced.

Marcus Grubb, head of research at the World Gold Council, says hedge funds are desperate for cash and are selling assets that are easily liquidated – gold. He expects that process to work itself out soon, and for gold’s fundamental attractions to reassert themselves.

He says global production of gold has been falling around 3%-4% a year since 2001, with many big South African mines close to exhaustion. China is the world’s biggest gold producer, but exports none. India is the world’s biggest consumer of gold and, as its economy and those around Asia expand, demand will outstrip supply.

But some warn that investors are being lulled into a false sense of security.

Demand for gold jewellery fell in the US and UK late last year. Saxo Bank, which specialises in gold and silver trading, said this week: “As real physical demand is falling in most precious metals (silver by as much as 70% in some regions), it becomes hard to support a rationale that underpins a fundamentally bullish market … we retain our short-to-medium target of $780.

How to invest: You can buy gold unit trusts (mostly invested in gold mining company shares; gold exchange-traded funds (which invest directly in gold) and gold coins and bars.

Funds: The oldest and biggest is BlackRock Gold & General, down 24% in the past year. It requires at least £1,000. Others include Investec Global Gold and Smith & Williamson Global Gold.

Gold ETFs: Or Exchange Traded Commodities (ETCs), these invest in physical gold and can be traded via a stockbroker, or go to etfsecurities.com where you can buy a single security, equivalent to one-tenth of an ounce (around $90). The fee is 0.39% and your gold is held at an HSBC-run vault.

Gold coins: Kruggerands are the top seller with ATS Bullion at £763 for a troy-ounce coin. Sovereigns are £182 and have an advantage for UK buyers – they are still legal tender, so there is no capital gains tax when you sell.
Patrick Collinson

Japan

Japan’s Nikkei 225 stock average stands 80% lower than its peak in late 1989. And over the past two decades, there’s been a constant stream of false dawns.

“The market does not tell the real story,” says John Millar, manager of the Martin Currie Japan unit trust. “While there’s no denying share prices are volatile and Japan’s manufacturing has been hit by the global slowdown, there are some extremely well-run companies such as Honda and Panasonic. There’s now the chance to buy long-term assets at low valuations. My favourite is Jtek, a car parts maker which will do well if Toyota sales recover.

“I can’t say this is the bottom of the market – no one can – so the sensible strategy is to invest via a monthly savings plan. If the market went back to last June, investments would double.”

Anzelm Cydzik at investment trust group Baillie Gifford believes it will be different this time. “Japanese consumers are cash rich, not indebted, and besides buying goods they are buying shares. Balance sheets have been restored to health since the problems of the 1990s – arguably, they are sounder than in other major economies with many companies having no debt.”
Tony Levene

Emerging markets

Russia’s stock market and currency have both taken a pasting; China is laying off 20 million or more factory workers; Africa’s investment scene is a basket case; and India’s share index is struggling. Over the past year, funds in emerging markets – stock exchanges outside the traditional industrialised nations such as the UK, US, western Europe and Japan – have slumped 32%, according to Trustnet.com.

Many reckon it can only get worse as the problems of developed economies increase. But according to Bryan Collings, who manages emerging markets money at funds boutique Hexam Capital, investing in developing countries is the only way forward. Hexam is a new group – it has yet to come up with one-year figures for its Global Emerging Markets fund.

Collings is so sure of his theme that he states the investable world has reached a once-in-a-century turning point. “You have to look outside the developed world to avoid a wealth shortfall,” he says. He believes its a straight culture clash. “Look at what’s wrong with developed markets. They are crushed both by debt, and the problems caused by an aging population,” he says. “People and firms in emerging markets have positive cash positions: they save rather than borrow.”

He contends that being unburdened by the excessive debt that has brought western economies to their knees, allows countries to fund growth.

“Emerging markets also benefit from a structure that may not appeal to some – they are command economies whose lack of democracy makes it easier to get major spending projects going. China has savings and can just order new infrastructure,’ he says.

Emerging market shares have been hit hard, but that is in part because investors in established economies have sold shares in new markets to bolster their cash positions at home. Unit trusts and other funds have pulled out around $50bn since the financial crisis started last autumn. But this sell-off is now slowing.

Collings has an almost messianic belief in emerging markets. “We in the west have blown it. We are now seeing a change comparable with the decline of Argentina and the collapse of Austria-Hungary a century ago. This is where the US falls and China takes over.”

How to invest

Take your pick from funds from Asia, eastern Europe (mostly invested in Russia), Latin American , BRIC (Brazil, Russia, India and China), and global and single country funds.

All of them are fairly risky. Because of their high volatility, they are more suitable as a long-term regular savings option than a lump-sum investment. Top performing funds at the moment include those from First State (Global Emerging Market Leaders), Baring, Aberdeen and Schroders. Beware of relatively high charges: buy through fund supermarkets.
Tony Levene

Unemployment set to burst through 2 million

It is possible that the record claimant count rise of 118,000 in the depths of the early 1990s recession could even have been exceeded last month

The relentless growth in Britain’s army of the jobless will be confirmed today as unemployment is set to burst through the 2 million mark for the first time in over a decade.

 

Experts are warning that unemployment will easily break the 3 million barrier this year, with many more people facing a grim 2009 that is likely to keep consumer spending, and the whole economy, depressed.

But while attention has focused on the widest survey of joblessness known as the ILO measure, there could also be a very big rise in the claimant-count measure because February has a five-week gap between count dates, as opposed to four in January. Many people laid off in January may not have signed on at job centres until last month.

This means it is possible that the record claimant-count rise of 118,000 in the depths of the early 1990s recession could even have been exceeded last month, up from the increase of around 80,000 that has been the norm in recent months.

That total would be even worse if 16- and 17-year-olds were included in the claimant count and if unemployed City workers were poor enough to be eligible for jobseeker’s allowance.

The wider ILO measure, though, does include young workers and shows that they account for nearly 40% of the rise in joblessness over the past year. It has risen by a total of nearly 400,000 over the past year while the claimant count has jumped even further, by 440,000, to 1.23 million, or 3.8% of the workforce. The ILO rate is higher at 6.5% and set to shoot above 10% later this year.

Economic inactivity

There would also be more people out of work if various firms around the country, especially carmakers , had not come up with novel schemes to cut working hours or mothball plants. This shows up in the data on total hours and average hours worked – both of which are falling. Some economists have speculated that unemployment would be higher still if some people were not hidden by the “economic inactivity” label that encompasses nearly 8 million people of working age who are either students, long-term sick or looking after the home. But figures for “inactivity” have remained steady over the past year or two.

As is typical of recessions, male unemployment has risen nearly three times as fast as female. Much of the reason is that many more women work in the public sector, which has largely been spared the swingeing job cuts of the private sector.

At the same time, full-time jobs are declining fast while the number of part-time jobs is actually still rising, possibly as people who lose a full-time job opt to work fewer hours, or as a spouse whose husband or wife loses a full-time job takes a part-time one to make ends meet. As more women work part-time than men, it would also explain why female unemployment has risen only slowly.

Unusually, there is very little difference between manufacturing and service-sector unemployment, or between the regions. “What we have seen is a general slump in global demand which has hit the demand for labour everywhere. So there is no clear north/south or manufacturing/services split in this recession,” says John Philpott, chief economist at the Chartered Institute of Personnel and Development.

Builders surprisingly resilient

One curiosity in the official data is that there does not seem to have been a big drop in the numbers of people employed in the construction sector, which accounts for about 6% of the economy. With the widely documented collapse in the commercial property sector and in housebuilding, this is baffling the experts, who speculate that public investment projects such as the preparations for the Olympics could be helping support the industry. Another factor could be that many builders are self-employed and are simply working fewer days in a week in response to a drop-off in demand.

There are also large numbers of immigrant workers involved in the construction sector and records of exact numbers may be poor, especially as the data is based on surveys of workers and so may simply have missed the fact that many Poles, for example, are returning home as demand for their services slumps.