Investors too complacent on world economy -IMF

Date: Wednesday, December 27, 2006
Author: Reuters

WASHINGTON, Dec 27 (Reuters) - Global economic growth is on a solid track but still faces risks, the IMF said on Wednesday, cautioning that the apparent complacency of many investors could trigger a market upset if something caused them to take fright.

"Market sentiment has gravitated toward a central scenario for a benign slowdown which keeps inflationary pressures contained," the International Monetary Fund said in an update to its bi-annual Global Financial Stability Report.

"But downside risks remain and there have been changes in underlying financial conditions that warrant continued vigilance," the IMF said. It noted debt leverage levels have grown at private equity funds, while hedge funds that sold financial options may be exposed to sudden market swings.

By and large, though, the outlook was encouraging. U.S. growth has slowed as the housing market has cooled, but there appears to have been little spillover from this to the rest of the economy, while activity abroad has gathered pace.

On the other hand, a sharp fall in volatility levels in financial markets, as well as a concentration of risk as investors adopt similar trading strategies, could be storing up trouble for the future.

"Investors appear to be giving insufficient weight to downside risks and might assume that the low risk premia are a permanent feature of the financial market landscape," it said.

In particular, IMF economists worried that cyclical factors might be adding to the low levels of volatility, which could reverse with potentially disruptive consequences.

"A volatility shock -- perhaps caused by a downward shift in growth expectations or by renewed inflationary pressures -- could precipitate portfolio adjustments and raise underlying volatility," the IMF said.