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Quick Thought Of The Week: Warning

Brian-Hillegas-Flickr

The naysayers at the International Monetary Fund are having a field day. They have issued two warnings in the space of just 24 hours.

In its first warning, they downgraded their world growth forecast for the rest of this year and for 2019, too. It has been cut from 3.9% to 3.7%.

The IMF blamed new trade barriers for the slower rate of growth. I think we can guess who it was pointing its finger at.

It said a full-blown trade war could put a significant dent in the global economic recovery by hitting households, businesses and the wider economy.

In its second warning, it said America’s economic recovery could put pressure on emerging-market economies such as Turkey and Argentina, which have large amounts of debt.

It added that there is a risk that capital outflows from emerging markets to the US could accelerate. It said that over a year, the outflow could hit $100 billion, which would be of similar magnitude to before the financial crisis of 2008.

Those are worrying forecasts. But they are nothing that we don’t already know. Economic growth doesn’t go up in a straight line. It doesn’t rise forever, either. At some point they might stall or even go into reverse.

Meanwhile, the outflows from emerging markets is not exactly unexpected. The difference in rising interest rate between the US and other markets is proving to be too attractive for some to ignore.

…. Point is, money tends to follow money. So, if the market thinks that the dollar is a one-way bet, it will pile into the greenback. And it has.

If it thinks that US tech stocks are a one-way bet, it will pile into those FAANG stocks. And it has.

This will continue until it doesn’t, which is now.

The brutal selloff in US equities, which saw the Dow Jones Industrial Average dive by more than 800 points or 3.2%, has dragged other markets lower. Singapore has not been spared.

We need to remember that there is no such thing as a one-way bet. And that “dumb” money will follow “dumb” money into the most dangerous of places.

On the other hand, “smart” money goes in search of value and looks for sustainable yields.

Turbulent markets are uncomfortable for “dumb” money. But they are a godsend for smart investors who know where to look for bargains.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.