25/01/2012 - 10:59

What’s a few per cent between banks?

25/01/2012 - 10:59


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Recent warning about slowed global growth should be heeded, and risk avoided in 2012.

Recent warning about slowed global growth should be heeded, and risk avoided in 2012.

THE Vampire Squid is more confident than Godzilla and that’s good news, despite sounding like a line from a 1950s Japanese horror movie.

Translated, it means that one of the world’s top investment banks, Goldman Sachs, is more confident about the economic outlook for 2012 than the World Bank.

Goldman, dubbed the Vampire Squid because of its ability to suck profits from anything that moves, reckons global growth this year will be a reasonably respectable 3.2 per cent.

The World Bank, an international organisation with the job of helping poor countries, reckons growth will be around 2.5 per cent. As central banker to the world’s central banks, its view counts; or does it, and does a 0.7 per cent difference really matter?

There are two reasons why the difference between an investment bank and a central bank is important.

Firstly, because knocking 0.7 per cent off the total value of a year’s growth by the entire world is a big event, measured in the billions of dollars, and perhaps as much as a trillion dollars. For Australia (Western Australia in particular) it means a sharp fall in demand for commodities such as iron ore.

Secondly, the World Bank’s forecast hit the headlines last week not so much because it was on the low side of expectations, but more because of the sudden decline in how it sees the outlook for growth.

Just six months before the World Bank published its latest global ‘health check’, it had forecast growth for 2012 of 3.4 per cent. The new number of 2.5 per cent reflects a revised view based on Europe’s financial crisis and how it is affecting every country in the world, including Australia.

 “An escalation of the crisis would spare no-one,” said Andrew Burns, manager of global macroeconomics at the World Bank. 

‘Worse than the global financial crisis’, screamed some headlines.

Goldman Sachs disagrees, and while it would not normally be appropriate to compare the views of an investment bank and the world’s ultimate central bank, there is a good reason this time because the two forecasts were published within hours of each other.

The World Bank’s well-reported view is for high-income countries (most of the Western world) to ‘enjoy’ growth this year of just 1.4 per cent, a tip that is almost half the previous forecast of 2.7 per cent. Developing countries (Asia, Africa and South America) will have their growth trimmed from 6.2 per cent to 5.4 per cent.

Goldman, in its latest investment strategy report, reckons the growth outlook for the world has declined from 3.4 per cent to 3.2 per cent thanks to Europe’s dithering, but 2013 will be a much better year with a 4.1 per cent rebound.

Australia, according to Goldman (the World Bank does not give country specific forecasts) will grow by 2.5 per cent this year, a significant cut from the 3 per cent tip of a few months ago.

Economic growth forecasting, which is the modern world’s equivalent of witchcraft, should never be taken too seriously, but there a few worthwhile observations to be made about these two latest example of crystal-ball gazing.

• Australia’s outlook might be down, but Goldman appears to have the country halfway between the developed and developing worlds, almost certainly a comment on the close ties between Australia and China.

• WA, thanks to its even closer ties than the rest of the country, should fall somewhere between Goldman’s Australia tip of 2.5 per cent and the World Bank’s 5.4 per cent for the developing world – perhaps the halfway point of 3.95 per cent (or 4 per cent if rounded up).

Both of the gloomy forecasts match the warnings carried repeatedly in this column for several months, and even more loudly in its online cousin, which caused a few readers to get somewhat tetchy and caused Bystander to wonder whether his forecasts had been ‘borrowed’ by the World Bank (penned with tongue in cheek).

The importance of what the Goldman and the World Bank are saying is that 2012, even in commodity rich WA, will be a year when risk should be avoided, at least until July when we might have a clearer picture of a very messy global economy.

Process of decline

A ‘KODAK moment’ was once a snappy way of saying that photography was a great way to store memories. 

Future generations might remember it as a way of describing business failure caused by blinkered vision.

Kodak’s failure has been well recorded, and hinges largely on its mistake to stick with old technology (film) when new technology was advancing. 

The excuse from Kodak management was the profit margins in digital were much thinner than film.

Well, film was more profitable once upon a time, but then the world went digital at the speed of light – a switch that caught out books, music, retailing, and almost certainly traditional means of gambling such as casinos and poker machines.

There is, however, more than a technology message in a Kodak moment. There is a management message along the lines of ‘keep your growth options open and don’t rely on a single asset, or product’.

To see that lesson at work in mining take a squizz at OZ Minerals, which has one mine in production and few growth options apart from paying a fat premium for control of WA copper stock, Sandfire Resources, in which it has an 18.8 per cent stake, and which could have been bought at half that price just 18 months ago.

The Kodak moment happening at OZ is why it has been added to the ‘sell’ list of several top investment banks, which have become concerned about a company that has missed too many opportunities in the name of sticking with what it knows – a fast-depleting hole in the ground.

Code talkers

ON stocks to sell ... have you asked your broker whether he keeps a ‘sell’ list. If he says he doesn’t then he’s not being honest because of the top 200 stocks on the ASX the consensus is that 70 per cent fall into a hold-sell category – with hold generally code for sell, but we like management too much to be so rude. 

Of the 30 per cent with a firm ‘buy’ recommendation alongside their name, most are resources-based – another positive for WA.


“The petty economies of the rich are just as amazing as the silly extravagances of the poor.”

William Feather


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