Fear the taper, not the forecast

The IMF's downgraded growth forecasts should not shake local investors, but the consequences of Fed tapering and slowing growth in China will be more serious.

Slowing growth in China is of particular concern to the International Monetary Fund, but it is something Australian companies and investors have already considered. The share prices of BHP Billiton and Rio Tinto have already been whipped by investors at the mere thought of spluttering from China and lower commodity prices.

It would be naïve to think the state of the global economy has no impact on our share market, but in comparison with commodity prices, history suggests it isn’t that significant.

For Australia, much of our terms of trade are determined by the value of exports, which is influenced by commodity prices. Unfortunately, a stubbornly strong Australian dollar doesn’t bode well for the miners, offering little currency benefit in the immediate future leaving cost reduction as the best option to maximise profitability.

A major determinant of final terms of trade numbers is the iron ore price. Current forecasts among various analysts are varied, however the long-term trend sees prices moving lower. It would be safe to say the miners have accepted this will become reality and have taken moves to increase volumes produced to provide some offset and maximise margins.

As we have seen in recent times, the miners have reported lower profits and have lagged the broader index. This is in stark contrast to when times were good and they were responsible for dragging the market to all-time highs.

Overall the lowering of global growth forecasts from the IMF is not necessarily something to be feared by investors. It is important to remember the share market is a forward-looking indicator and is generally a good six or so months ahead of the actual economy. If this holds for the time being, Australia has better economic times to come yet.

Beyond China, the other concern of the IMF is the Federal Reserve's plan to wind back from their easy monetary policy stance. Depending on how long-term bond yields respond when this begins will ultimately determine the impact on global growth forecasts. High yields won’t be favoured by the share market, consequently markets could unwind quickly from current levels.

The future of monetary policy pursued by the US looks like it will have more of an impact on the global share market. It also has the potential to possibly crimp global growth along the way beyond that of the IMF forecasts.

For now, the major concern facing our sharemarket and global markets will be the ramifications of Federal Reserve's decision to begin tapering.