Saxo Bank is a global leader in online trading. Their integrated platforms enable clients to trade by routing orders directly to the markets via the bank’s liquidity and infrastructure partners…
The driving force behind Saxo’s market-leading service is the bank’s team of analysts, who have a knowledge and understanding of the current economic climate that is second to none. Each year Saxo Bank release their Outrageous Predictions analysis. Based on the philosophy’s black swan theory, Outrageous Predictions aims to predict extreme circumstances that may impact the global markets in the year ahead (see www.saxobank.com for some fascinating reading). The New Europe caught up with Saxo Bank’s Chief Equity Strategist Christian Tegllund Blaabjerg, and Consulting FX Strategist John Judson Hardy, with some questions of our own regarding challenges facing the international markets.
Outlook for the euro?
The euro endured a tumultuous 2010 beset by the problems of Greece and later Ireland, as well as market dissatisfaction with the performance of a number of other key member states. We asked John Judson Hardy, what he thought the year had in store for the single currency.
“It is clear that the eurozone is headed for a very critical test for its survival – a test we believe it will eventually fail in the long run, but not before EU politicians and ECB make a significant effort to keep the various nations in political and monetary union. Any effort, regardless of the form it takes (enlargement of the rescue fund and/or some new powers granted to the ECB that make possible new, unsterilised quantitative easing), will have negative implications for the currency. There are also reasonable odds that one or more of the nations on the eurozone periphery will default. Such a default would throw the already highly leveraged European banking system into disarray, with a massive need for public backing of banks and all of the negative implications a banking crisis would have on the currency and economic growth. Such a move would also see an explosion in debt spreads on contagion fears – fears that the ECB and EU political leadership would have a very hard time putting a lid on. The euro is headed for the fight of its life. The only solace is that some investors might find that the world is already very pessimistic on the eurozone’s prospects, therefore the currency might become a safer harbour rather than some of the most pro-risk currencies in 2011 – if risk aversion becomes a theme.”
Regulation & emerging markets
So what of the stress tests introduced under new regulation to expose structural weakness in the European banking system? Will they serve their function? John Judson Hardy continues: “The stress tests are widely considered far too lenient and don’t show the true scale of risks to the European banking system, which is actually far more leveraged than that of the U.S. Also, in the eurozone, the ECB does not have the kind of powers that the Federal Reserve does, so in an outright panic, it will be even harder pressed to get ahead of the curve and stop the kinds of problems with short-term funding that quickly see the system grinding to a halt. Unless it is backed with additional public funds.”
We raised The Independent’s surprising report that the two best performing stock markets of 2010 were Sri Lanka and Mongolia and asked Christian Tegllund Blaabjerg for his thoughts on market trends for 2011: “For 2011 we have ranked the regions across the world. First in line in terms of the best price return from the equity markets are emerging markets, second the U.S. and third Europe and fourth Japan. [The placing of] Japan could surprise to the upside, but that is a whole different story.
This year equity markets are not going to be driven by earnings growth (like last year), but P/E expansion. This is due to the fact that valuations are currently depressingly low compared to the level of real interests.
So once the investors for real starts have confidence in the recovery (which we will expect will happen in 2011) equity prices will move higher and earnings growth will remain slow.
Emerging markets will for many years be the leader in equity markets simply due to the fact GDP growth in this region will far outpace the GDP growth in the U.S., Europe and Japan.
Since there is a strong correlation between sales growth and GDP growth, companies exposed to this region either as foreign companies investing in emerging markets or domestic companies exposed to their home markets, will outperform most other companies.”