Global central bankers, finance ministers and representatives from the private sector and civic groups gathered in Bali recently for the annual meetings of the IMF (International Monetary Fund)/World Bank Group. Below are 10 key takeaways from the discussions.
1) Investor global risk sentiment is cautious with no large directional views. This reflects higher uncertainty on U.S. and China trade policy, the outlook for the Federal Reserve’s tightening cycle, the Italian budget and EU negotiations, and generalized weakness in emerging markets (EM). This caution notwithstanding, there was no imminent cliff event in focus with baseline expectations being for negotiated (but drawn-out) outcomes that will keep near-term uncertainty high.
2) The macro outlook for the global economy is constructive with the projection for growth in 2019 slowing to around 3.5% but remaining at relatively robust rates (in line with PIMCO’s recently published Cyclical Outlook, “Growing, But Slowing”), and global inflation being contained in developed markets and most of EM. Key questions on investors' minds included whether above-trend U.S. growth would continue as the fiscal tailwind diminished and the extent and impact of China’s countercyclical measures to shore up growth. A potential U.S. recession was viewed as a question for 2020 and beyond rather than for 2019, but overall it is now widely accepted that global growth has passed its peak. In EM, the recovery was expected to continue at a more gradual pace with policymakers’ focus turning to much lower potential growth than previously acknowledged.
3) There is a growing resignation by the IFIs (International Financial Institutions) that the global multilateral approach is giving way to a more unilateral approach led by the U.S. So far there has been very limited policy resistance to U.S. trade protectionism against China, which is viewed as a bilateral negotiation, similar to the U.S.–European negotiations. This is in spite of the view by most that declines in global trade and the potential for trade wars are disruptive for the global economy as a whole with very few long-term winners.
4) U.S.–China trade tensions are here to stay with this being the first of many cycles of disputes/negotiations (as distinct from the USMCA, i.e., NAFTA 2.0). Most policymakers and investors expect only a gradual depreciation of the Chinese yuan versus the U.S. dollar rather than an outright “currency war”, but there are other proxy “wars of influence” occurring between the U.S. and China. Examples include Pakistan, which has received significant Chinese lending and is now turning to the IMF for support, as well as the growing backlash in EM against Chinese financing of large-scale projects with what is viewed as disadvantageous and opaque terms.
5) Sentiment towards EM is cautious but improved from the peak bearishness of the summer. The combination of a hawkish Fed, stronger U.S. dollar, trade tensions, and idiosyncratic EM drivers are keeping many investors cautious on taking large directional bets on the asset class. Nevertheless, there is a sense that pockets of value have emerged leading investors to focus on alpha and tactical trades. Distinct from the recent past, although there are positioning overhangs from earlier in the year, there are no large consensus trades, with relatively mixed views across the big components of the asset class.
