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IMF Cuts Global Growth Forecast: ETFs in Focus

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The International Monetary Fund (IMF) has forecast the global growth of 3.7% for this and the next year, per the latest World Economic outlook. The forecast fell by 0.2 percentage points from the April report, which estimated global growth at the rate of 3.9% for these two years(see: all the World ETFs here).

Earlier projections now appear to be “over-optimistic” given that risks from “further disruptions in trade policies” have become more prominent, said Maurice Obstfeld, IMF chief economist, in a prepared speech.

Trade policy concerns and import tariffs are affecting commerce. Simultaneously, the emerging markets are struggling with tight financial conditions and sizable outflows. Energy-rich EM countries like Russia and Saudi Arabia have fared well due to higher oil prices.

The 2018 growth forecasts were unchanged for the United States and China at 2.9% and 6.6%, respectively. However, the forecasts were cut for 2019 as the effects of recent tariffs will be majorly felt next year. U.S. growth forecast fell to 2.5% from the previous 2.7% and China’s growth forecast fell to 6.2% from earlier estimated 6.4% (read: Top Foreign ETFs of Q3).

Eurozone forecasts fell by 0.2 percentage points to 2% for 2018. Germany is affected by a drop in manufacturing orders and trade volumes. Italy’s stock market fell to its lowest level since April 2017 on Oct 8 as the dispute between Rome and EU escalated over Italy’s budget.

The emerging markets, which faced a massive sell-off in the recent months, saw large growth cuts. There were notable revisions for the countries of Argentina, Brazil, Mexico, Iran and Turkey. “The negative revisions for emerging market and developing economies are more severe,” said Obstfeld. “Broadly speaking ... we see signs of lower investment and manufacturing, coupled with weaker trade growth.”

In comparison to six months ago, the projected 2018-19 growth in advanced economies is 0.1 percentage point lower. These include downgrades for the United Kingdom, Korea and euro area. The emerging markets and the United States face more negative revisions of 0.2 and 0.4 percentage points, respectively.  Broadly, IMF sees lower investment and manufacturing with weaker trade growth.

The advanced economies are experiencing easy financial conditions. However, the tighter monetary policy being adopted by the United States along, trade war uncertainties and several individual factors for countries like Argentina, Brazil, South Africa and Turkey have led to severe pain in the EM and developed economies. These have discouraged capital inflows, depreciated currencies, pressured equity markets and exerted pressure on interest rates and spreads. These economies account for 40% of world GDP at the market exchange rates and any reversal in them would pose a substantial threat to the advanced economies.

Two major regional trade arrangements are in flux — the United States-Mexico-Canada Agreement (which awaits legislative approval) and the European Union (with the latter negotiating the terms of Brexit).  These trade policies could contribute to more downside risk in the near term. IMF dreads the impact of U.S. tariffs on China especially on the auto and auto part imports which could eventually disrupt the supply chains, if the tit-for-tat game continues (read: September U.S. Job Data Mixed: ETFs That Gained).

IMF vouches for a more inclusive growth going forward so that centrist and multi-lateral approaches to policy making and politics would not cause more vulnerability to the world economy. As a result, investors must be interested in considering global ETFs.

ETFs in Focus

iShares Global 100 ETF (IOO - Free Report)

It tracks the S&P Global 100 Index and provides exposure to a broad range of large international companies in developed and emerging markets with majority of the funds invested in the United States (64%).  It comprises 104 holdings. AUM is $1.9 billion and expense ratio is 0.40%.

JPMorgan Diversified Return Global Equity ETF (JPGE - Free Report)

It tracks the FTSE Developed Diversified Factor Index. It comprises 562 holdings and allocates majorly to Japan (28%) followed by Asia ex Japan (24.6%), Japan (22.5%) and Europe (20.3%). AUM is $211 million and expense ratio is 0.38%.

iShares MSCI ACWI ETF (ACWI - Free Report)

The fund tracks the MSCI All Country World Index. U.S. is the primary target with nearly 56% allocation. It comprises 1381 holdings. AUM is $8.8 billion and expense ratio is 0.32%.

FlexShares International Quality Dividend Index Fund (IQDF - Free Report)

It tracks the Northern Trust International Quality Dividend Index. AUM is $827 million and expense ratio is 0.47%. It comprises 191 holdings and United Kingdom is the major country in focus (14.7%) followed by Japan (14.3%).

SPDR S&P Global Dividend ETF (WDIV - Free Report)

It tracks the S&P Global Dividend Aristocrats Index. Only a couple of countries occupy double-digit weights in the fund — United States (21%) and Canada (20%).  AUM is $204.5 million ad expense ratio is 0.40%.

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