Foreign Banks Stock Outlook – June 2015

Where Will Uneven Global Growth Take Foreign Banks?

The global economy proved its resilience once again in recent months after a cruel start to the year. While it can be safely said that growth remains moderate – actually a good reason for foreign banks to cheer – the prospects look uneven across the countries.
 
The International Monetary Fund’s April update of the World Economic Outlook reveals its optimism on the future of the advanced economies and pessimism surrounding the growth prospects of the emerging nations. The Fund projected 3.5% growth for the world economy in 2015, is in line with its January forecast.
 
While the recently released biannual Global Economic Prospects report by the World Bank looks a lot glummer with a mere 2.8% growth projection for the world economy in 2015 (versus 3% forecast in January), it echoes IMF’s concerns pertaining to the emerging world. Kaushik Basu, the World Bank’s chief economist said, “We are advising nations, especially emerging economies, to fasten their seat belts.”
 
Lower commodity prices, which is a result of a significant drop in oil prices since last year, will eventually lead to global growth. But the looming interest rates hike in the U.S. would make borrowing costlier for other economies. This, coupled with the strengthening of the dollar, will put a check on the growth of the global economy.
 
Where the Key Economies Stand 
 
The performance of Eurozone is still not impressive with continued uncertainty stemming from the Greece conundrum, but the overall economy is finally shaping up. This has been possible partly because of improved equity and bond markets on the back of the quantitative easing, which began in March. In addition to this, lower oil prices and better credit market conditions were major drivers. The IMF has upgraded its growth forecast for the zone by 0.3%.
 
The second largest economy China is still slowing, but the government has been taking more aggressive steps to stabilize growth. The primary focus of the government has been to ease monetary strictness in order to boost credit activity and prevent devaluation of the property market.     
 
Japan is showing signs of recovery, though feeble, banking again on a loose monetary policy.
 
Russia is still troubled by Western sanctions and declining oil prices. While the government is trying to lessen the country’s dependence on the West by extending its relationship with China, huge external corporate debt, declining foreign currency reserves and a high inflation rate should keep the Russian economy in troubled water for some time. According to the IMF, Russia is the worst performing among the big economies and could witness a deep recession this year.