The International Monetary Fund (IMF) had previously considered the slump in oil prices to be a “shot in the arm” for the global economy. IMF Research Department head Olivier Blanchard and commodities head Rabah Arak had written last year that the lower prices may boost global economic growth by 0.3% to 0.8%, above the IMF’s baseline global growth estimate of 3.8%.
However, they had stated that the numbers were simulation and not forecast. They had also warned that price changes and uncertainties “can lead to increases in global risk aversion, with major implications for repricing of risk, and for shifts in capital flows.”
Now, the IMF has made the sharpest cut to its global growth forecast in three years. The IMF has cautioned that the benefit from lower oil prices will be diminished by dismal economic prospects in Russia, the Eurozone, China, Japan and oil producers. The IMF now sees global growth at 3.5% in 2015, down from the previous projection of 3.8%. The IMF lowered its forecast for 2016 to 3.7% from 4.1% projected previously.
The IMF’s reduced view on the global economic growth echoes what the World Bank had done last week. World Bank had cut world growth forecast for 2015 and 2016 to 3% and 3.3% from June’s estimates of 3.4% and 3.5%, respectively. Even the World Bank had noted that the boost from oil prices would be offset by dismal economic prospects in China, Japan and others.
Amidst the dim view, investors may look to drop foreign stocks, or ADRs, from their portfolios. Before we pick the bottom-ranked ADRs that should be dropped immediately, let’s look at the growth projections.
IMF: World Economy Facing Cross Currents
Olivier Blanchard said on Tuesday that “The world economy is facing strong and complex cross currents… On the one hand, major economies are benefiting from the decline in the price of oil. On the other, in many parts of the world, lower long-run prospects adversely affect demand, resulting in a strong undertow.”
In the World Economic Outlook (WEO) Update, the IMF projected global growth at 3.5% in 2015, which happens to be up from 3.3% in 2014. The IMF lowered emerging market growth estimates to 4.3% from 5%.
IMF said that the oil prices will boost global growth, but “this boost is projected to be more than offset by negative factors, including investment weakness as adjustment to diminished expectations about medium-term growth continues in many advanced and emerging market economies.”
China is expected to witness slower growth of 6.8%. Incidentally, China reported 7.4% growth in 2014, its slowest in 24 years. The Eurozone and Japan are expected to grow 1.2% and 0.6%, respectively, in 2015. The IMF believes weaker investment in Europe will offset benefits from lower crude prices, weaker currency and the ECB’s expected move to expand monetary stimulus.
Russia witnessed the largest downward revision. The IMF now sees oil exporter Russia to suffer a 3% contraction, as against prior projection of 0.5% expansion. Lower crude prices and the geopolitical tensions are expected to affect Russia.
World Bank Pegs Growth at 3%
The IMF’s reduced world growth forecast comes a week after the World Bank trimmed its global growth outlook as they believe the slump in oil prices will not be enough to counteract major concerns. Dismal economic prospects in the Eurozone, Japan and certain other key emerging economies may erode the gains that lower oil price has to offer.
Except for the US and India, the World Bank lowered growth projections for key economies. China is expected to witness GDP growth of 7.1%, as against prior projection of 7.5%. It is followed by India, the US and South Africa with growth estimates of 6.4%, 3.2% and 2.2%, respectively. Among the key economies, only Russia is forecasted to suffer contraction. The World Bank revised outlook down from 0.5% growth to a negative 2.9%.
US Continues to Look Strong
Both IMF and World Bank have positive view on the US. The IMF made upward revision to estimates only for the US. The biggest economy is expected to grow at 3.6% in 2015, up from October’s estimates of 3.1%. The domestic demand that is supported by lower oil prices and accommodative monetary policy stance is expected to benefit the US.
The World Bank acknowledges the plunge in oil prices to have helped US’s recovery as consumers had more money. The World Bank sees US expanding at 3.2%, up from prior estimate of 3%. World Bank chief economist Kaushik Basu had said: “The global economy is running on a single engine… the American one.”
2 ADRs to Sell
Below we present 2 ADRs that should be dropped from the portfolio. Each of them carries unfavorable Zacks Rank, negative growth estimate, falling share prices over the past four weeks and a declining earnings estimate trend.
Statoil ASA (STO) is a Norway-based major international integrated oil and gas company. Statoil’s performance will likely be affected by the volatile macro environment, fluctuating oil and natural gas prices and geo-political disturbances. Statoil’s financial and operational performances face a number of headwinds, including changes in exploration and production spending patterns, commodity price fluctuations, geopolitical risks, regional spending trends, competition, among others.
Statoil currently carries a Zacks Rank #5 (Strong Sell). Growth estimate for the year is a negative 32.5%. Share prices dropped 2.3% over the last four weeks. Current quarter estimates are down 4.6% over the last one month.
Vodafone Group Plc (VOD) is a popular wireless communications operator. Based in Newbury, United Kingdom, Vodafone operates independently and through affiliates, notably under the Vodafone brand name. Weak economic conditions have compelled consumers to switch to cheaper alternative services offered by Vodafone’s competitors. Vodafone is seeing deteriorating revenues due to mobile termination rate (MTRs) cuts, which is a fee that operators charge each other to connect calls). In fiscal 2014, the company lost around £900 million due to reduced MTRs.
Vodafone currently carries a Zacks Rank #5 (Strong Sell). The growth estimate for the year is a negative 71.4%. Share prices dropped 2.1% over the last four weeks. Current quarter estimates are down 12.5% over the last month.
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