IMF’s World Economic Outlook

Yesterday, the IMF released its October 2019 World Economic Outlook. In it, the monetary organisation lowered its economic growth forecast for Australia this year from 2.1% to 1.7%. The forecast for 2020 is slightly better at 2.3%, however this also fell 0.4% from the previously predicted 2.7%.

The IMF also reduced its estimate for global growth from 3.2% to 3.0% for this year as trade tensions and geopolitical concerns continue to dampen the growth outlook around the world.

The video below is a snippet from Episode 24 of The Australian Investors Podcast where macro expert Vimal Gor gives his take on RBA interest rates.

The Lucky Country

Australia is now in its 29th consecutive year of economic growth which is an impressive feat unmatched by global peers.

If I were to be cynical, I might say that for the most part, we have simply been extremely lucky. In the grand scheme of things, Australia neither creates nor produces much of any significant value, with the largest contributions to our GDP being attributed to what we dig from the ground. We had no say in the riches that were bestowed upon us, but we have benefited greatly from their existence.

Whether you consider it richly deserved or not, the question remains: how much longer will the streak of consecutive years of growth go on? Unfortunately, that question is impossible to answer. At some point in the future the streak will be broken, it’s inevitable if we simply allow for the passage of time.

What Does This Mean For Your Investment Portfolio?

Exactly when Australia will face the dreaded recession is not necessarily all that important for you and your investment portfolio. A recession may pose different challenges depending on what stage of life you’re currently in, but the basic fundamentals of buying shares rarely change.

Regardless of prevailing economic conditions, companies that offer a desirable product or service, possess a durable competitive advantage and have the ability to earn above average financial returns will always serve you well. If not in an absolute sense, then at least in a relative sense.

In the aftermath of the Global Financial Crisis, many high quality ASX companies were trading at very depressed valuations. For example, the Macquarie Group Ltd (ASX: MQG) share price dropped to as low as $20 despite continuing to operate profitably throughout the crisis.

Patient investors in Macquarie that held, and have continued to hold, their nerve have been handsomely rewarded, with the share price up more than 600% in less than a decade. Allowing for annual dividends paid along the way, the total return becomes closer to 800%.

Recessions are typically coupled with fear and panic as investors worry about the impending doom that is about to descend upon them. However, I’d suggest if the dreaded recession did make its way to our shores, that you remain calm, keep an eye to the long-term and stick to a plan.

That’s not to say some minor tinkering won’t be in order, but wholesale changes driven by fear and panic are almost certainly going to result in sub-optimal outcomes.

Disclosure: At the time of writing, the author of this article has no financial interest in any of the companies mentioned.