A company’s share value reflects its’ expected future earnings growth. Among other factors, the strength in earnings growth depends on the future economic prospects where the company generates its sales. In other words, the factors that drive economic growth will impact a company’s future earnings and are ultimately reflected in its share value. Having said that, economic growth forecasts are therefore key to financial market returns. 

In the report issued earlier in the week, the International Monetary Fund (IMF) updated its global growth forecasts, highlighting tentative signs of stabilisation in economic growth numbers. Albeit a slight downward revision in estimates, driven by negative surprises in emerging market economies, global growth is expected to slightly increase from 2019 estimated growth of 2.9 per cent to 3.3 per cent in 2020 and 3.4 per cent for 2021. 

The gradual pick-up in economic activity is dependent on a macro environment that supports trade growth and a recovery in domestic demand and investment. This is contingent on the fact that geopolitical tensions remain contained. In comparison to the economic growth outlook issued last October, the IMF notes that the balance of risks, despite remaining on the downside, are “less skewed to adverse outcomes”. Recent developments have contributed to the more upbeat view.

To begin with, the signing of Phase 1 deal between the US and China has been a key determinant to the de-escalation of trade tensions over the past quarter. Further signals include this week’s tax truce between US and France, whereby Donald Trump and Emmanuel Macron agreed to hold off hostilities over France’s tax on digital service firms, until the end of the year. Time will tell whether the conflict has been averted or simply delayed, but in the meantime, markets have one less geopolitical risk to worry about.

Signs of a fading trade war bodes well for a manufacturing recovery, with an improvement in sentiment eventually expected to be reflected in higher capital investments. Case in point on Tuesday, the ZEW indicator of economic sentiment for Germany, a historically export focused economy which has suffered from a material deterioration in economic activity in 2019, shot up to its highest level since 2015. Signals that the manufacturing weakness might be bottoming out, however, have been mixed and not yet convincing. Meanwhile, the IMF reports that business sentiment and manufacturing PMIs have stopped deteriorating as temporary headwinds to the global manufacturing sector seem to have declined. 

Central Banks and the current accommodative global financial conditions are another key driver to the stabilisation in economic growth forecasts. The IMF report clearly highlights the importance of monetary policy stimulus to economic growth forecasts, stating that global growth estimates would have been 0.5 percentage point lower each year if the monetary stimulus was not in place. However, with limited further monetary policy responses, the IMF also joined the call for fiscal policy initiatives targeted at achieving productivity growth, for multinational cooperation, including a focus on minimising trade and technology conflicts, and for climate change initiatives.

Disclaimer: This article was issued by Rachel Meilak, CFA equity analyst at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.