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How does the latest IMF World Economic Outlook report resonate with investors in Namibia?

How does the latest IMF World Economic Outlook report resonate with investors in Namibia?

By Arney Tjaronda.

On 11 October 2022, the International Monetary Fund (IMF) issued a global economic outlook on how they foresee the macroeconomic environment in the short to medium term. To what extent does that affect investors in Namibia? To what lengths does this report impact the risk sentiments of investors’ portfolios?

IMF World Economic Outlook

As the International Monetary Fund and the World Bank Group, annual meetings commenced on Tuesday, October 11, 2022. The Chief Economist of the IMF Professor Pierre-Oliver Gourinchas communicated that the worst is yet to come following the projections of the growth of the global economy. The IMF says growth in the global economy is projected to slow down with contractions from three major economic areas such as; China, the United States of America, and the Euro Area. Global growth projections for 2022 are unchanged at 3.2%, while for 2023 are lower at 2.7%.

This is deemed to be one of the lowest economic growth in history since the 1970s. There is a possibility that 2023 could have a “feel-like recession” as uttered by the IMF Chief economist. Inflation is expected to peak at 9.5% in the third quarter of 2022, before decelerating by 4.1% by 2024. The Russia- Ukraine war has escalated macroeconomic conditions pushing the prices of food and energy on an upward trajectory as a result.

This could mean a continuous rise in the cost of living, as a result of rising prices of goods and services. As inflation continues to be a raging bull weakening consumer spending, central banks will inevitably hike interest rates to curb inflation. Consequently, this will further suppress credit extended to households and businesses in Namibia. The IMF also projected a decline in the real gross domestic product (GDP) of many sub-Saharan African countries like; South Africa, Ghana, Senegal, and Namibia. Things are going to be rocky before they return to greener pastures.

Recession fears on investors

The Nobel Prize winner Daniel Kahneman is one of the founding fathers of behavioral finance theory. The theory holds that the markets might fail to reflect economic fundamentals under conditions of irrational behaviour, systematic patterns of behaviour, and limits to arbitrage in financial markets. An expected pattern unfolded shortly after the IMF announced the global economic outlook, where market sentiments resorted to fear amid the news resulting in the decline of the NSX and JSE All Share bourse to below 0.52% and 0.28%, respectively that Tuesday.

When investors fear something, pessimism arises in the market, and when investors get excited about something, optimism arises in the market. When a recession occurs, investors assume that company earnings and employment declines, meaning that stock prices fall as most companies struggle to sustain profitability. When share prices fall, investors with equity holdings lose their returns as shareholder return diminishes, thus affecting their investment portfolios. To mitigate the risk of losing their invested capital, investors turn to liquid assets as ‘cash is king’ during recessions to hedge risks.

Investors are anticipated to restructure their portfolios’ strategic asset allocation (SAA) to more fixed-income securities than equities. This could mean that investors will be more invested in bonds as they are deemed safe. Investors who are invested in equities are expected to use industries that tend to provide resilient performance during recessions. These industries are consumer staples, health care, utilities, and real estate to some extent.

Looking at the recently published annual report for the year 2021 of the Namibia Financial Institution Supervisory Authority (NAMFISA), institutions like pension funds, investment managers, fund managers, and asset managers have listed equities as their biggest portion of assets under management followed by listed debt such as bonds, treasury bills, etc. Lately, investors have coped with volatile swings in the stock and bond markets, which can dampen optimism and contribute to heightened anxiety.

The month of September 2022, was evidence that investors were motivated by fear and anxiety, leading to a massive sell-off on the stock exchanges.

Investors are mostly concerned with inflation because, for investors, the returns on their investments must be at least the same rate as inflation; if they are less than that, their investments are losing money even if it shows gains. Additionally, interest rates are anticipated to rise to curb inflation rates and this affects bonds because they are sensitive to interest rate changes.

We are in unprecedented times where central banks are raising interest rates, therefore it is beneficial for investors to hold bonds that exhibit lower duration, to reduce exposure to interest-rate risk.

How investors could resonate

Investors could be resonating differently than the common market sentiments being displayed. They could see this as an opportunity to ‘buy the dips’ in those companies’ shares that are declining against the backdrop of the recession. They could implement other strategies such as value-investing strategies to enhance the performance of their portfolio.

Therefore, it is difficult to say how they will react as different people think differently. At the end of it all, investors have to generate absolute returns and they have to evaluate their ability and willingness to take risks.


About The Author

Donald Matthys

Donald Matthys has been part of the media fraternity since 2015. He has been working at the Namibia Economist for the past three years mainly covering business, tourism and agriculture. Donald occasionally refers to himself as a theatre maker and has staged two theatre plays so far. Follow him on twitter at @zuleitmatthys