IMF shock: World economy still growing

The IMF still predicts global growth. With the ASX down 18%, could double-digit sharemarket returns be more than a dream?

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Predictions of the death of the economy are greatly exaggerated, writes The Motley Fool

"Uncertainty is the last refuge of economists who can't explain what is going on."

You'd think the International Monetary Fund (IMF) should know more. It is an organisation of 187 countries, working to promote high employment and sustainable economic growth, and reduce poverty around the world.

It should have its finger on the economic pulse.

Oops…missed this one

But no. In slashing global growth forecasts and warning the world has entered a "dangerous new phase", IMF chief economist, Olivier Blanchard, says he "largely failed to perceive" the slowdown as it was happening this year.

And now, after world sharemarkets have plummeted, Greece is on the verge of default, Italy has had its debt downgraded and U.S. unemployment is stuck above 9%, the IMF cuts its global growth projections.

Talk about shutting the barn door after the horse has already bolted…

The Reserve Bank of Australia (RBA) is in the same camp, saying the international outlook has become "significantly more clouded".

All this translates into some juicy newspaper headlines.

The global economy projected to grow

But the fact of the matter is the IMF is still projecting 4% growth in world output in 2011 and 4% growth in 2012.

In this low interest rate environment, those growth rates are nothing to be sneezed at.

As far as sharemarket investors are concerned, from the low valuations and high dividend yields many stocks are trading at, it's good news.

Simple is good as far as The Motley Fool is concerned. Assuming shares are fairly valued*, if companies can grow their earnings by around 4%, and maintain a 5% dividend yield, investors should be looking at an annual return of 9%. We'll take a baseline of  9% compounding growth all day long, thank you very much.

Cheap shares could get cheaper

That said, we're not naïve enough to admit simple doesn't always work. Shares may be cheap now, but it doesn't mean they can't get cheaper. If that happens, you can forget your 9% return over the next year or so.

And, adding to the uncertainty, the latest IMF projection is just as likely to be wrong as the one before, and the one before that. Why we give such prominence to wrong predictions is beyond us. They make for great 'doom and gloom' headlines, the kinds of which sells newspapers, but as we pointed out above, they really are hindsight projections.

The Foolish bottom line

One thing is certain. If Europe implodes or if America's economy does slump into a double-dip recession, the IMF will be there to tell us all about it…3 months after the event.

Whatever happens, sharemarket investors have time on our side. Shares are not going to return 9% every year, year in year out. But over time, particularly from this relatively low base, we'd rather be buyers than sellers.

*Many shares appear undervalued, not merely fairly. An upward re-rating of shares, combined with an annual return of 9%, could see sharemarket's power forward from here. Fools dreaming? Maybe. But dreams are free.

Do you want to know what to do if the market crashes again? Request a new free Motley Fool report titled Read This Before The Next Market Crash. Click here for instant access.

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »