The UK economy growing by 8 per cent, the launch of an America First Tax and Asian nations banding together to take down the US dollar are some of Saxo Bank’s “outrageous predictions” that have the outside chance of sending shockwaves across financial markets next year.
While the below scenarios do not constitute Saxo’s official market forecasts for 2020, the bank said it is always a useful exercise to consider the full extent of what is possible – if not necessarily probable – in markets.
Steen Jakobsen, chief economist at Danish investment house Saxo Bank, said: “We see 2020 as a year where at nearly every turn, disruption of the status quo is an overriding theme. The year could represent one big pendulum swing to opposites in politics, monetary and fiscal policy and, not least, the environment.
“In politics, this would mean the sudden failure of populism, replaced by commitments to ‘heal’ instead of to divide. In policymaking, it could mean that central banks step aside and maybe even slightly normalise rates, while governments step into the breach with infrastructure and climate policy-linked spending.”
Below, we look at the 10 unlikely but underappreciated events at Saxo Bank thinks investors should spend some time considering.
1. UK nominal growth doubles to 8 per cent
The first outrageous scenario sees prime minister Boris Johnson win an overwhelming victory against Labour, allowing him to leave the EU on 31 January 2020 as promised.
However, “everything does not go according to plan” as the UK economy hovers on the brink of technical recession and there is growing discontent among the population on the rise in gross inequalities in the country, especially from Brexiteers.
“In an unprecedented turnaround for the Conservative party, the government decides to embark on a Modern Monetary Theory-based economic policy aimed to restore confidence, stimulate GDP growth and attract investment,” Saxo Bank said.
“This is the largest fiscal stimulus program in the UK since the end of World War II. It leads to a massive increase in public spending in infrastructure, health system, education and the implementation of ambitious programmes to support the housing market and provide financial assistance to the most disadvantaged populations.
“The Bank of England manages to contain the inflationary effects of this economic policy, and the strong rise in fiscal spending contributes to a jump in consumption and investment which lifts, to everyone’s surprise, post-Brexit Britain’s nominal growth from 3.5 per cent to 8 per cent in 2020. The business community applauds the MMT policy, the FTSE 100 is among the best-performing European indices in 2020, and foreign investors massively come back to the United Kingdom. Brexit is a success.”
2. The sudden arrival of stagflation rewards value over growth
In the next scenario, the US Federal Reserve is forced to “super-size its balance sheet beyond imagination” in order to finance massive spending initiatives launched by the Trump administration to stave off a recession.
“But a strange thing happens: wages and prices rise sharply as the stimulus works its way through the economy, ironically due to the under-capacity in resources and skilled labour from prior lack of investment,” the analysts said.
“Rising inflation and yields in turn spike the cost of capital, putting zombie companies out of business as weaker debtors scramble for funding. Globally, the US dollar suffers an intense devaluation as the market recognises that the Fed will only accelerate its balance sheet expansion while keeping its policy rate punitively low.”
While the value investing style has underperform growth for much of the post-crisis bull market, under this scenario that dynamic reverse and the iShares MSCCI World Value Factor ETF “leaves the FANGS in the dust”, outperforming them by 25 per cent.
3. ECB folds and hikes rates
The next outrageous prediction has Christine Lagarde take her seat as the new president of the European Central Bank and, having previously endorsed negative rates, “executes a volte-face” and states that monetary policy has overreached its limits.
“In order to force euro area governments, and notably Germany, to step in and to use fiscal policy to stimulate the economy, the ECB reverses its monetary policy and hikes rates on 23 January 2020. This first hike is followed by another a short time later that quickly takes the policy rate back to zero and even slightly positive before year-end,” Saxo speculated.
The EuroStoxx bank index rises 30 per cent after this.
4. In energy, green is not the new black
The oil & gas industry has been hampered in recent years by the US shale oil revolution, which pushed down prices, and the growing concern over climate change, which led to a surge in demand for renewable energy.
“The combined forces of lower prices and investors avoiding the black energy sector have pushed the equity valuation on traditional energy companies to a 23 per cent discount to clean energy companies,” the bank’s analysts said.
“In 2020, we see the tables turning for the investment outlook as OPEC extends production cuts, unprofitable US shale outfits slow output growth and demand rises from Asia once again. And not only will the oil & gas industry be a surprising winner in 2020 — the clean energy industry will simultaneously suffer a wake-up call.”
5. South Africa electrocuted by ESKOM debt
The fifth outrageous prediction has the South African government forced to balloon its budget deficit to 6.5 per cent of GDP, the worst in more than a decade, in order to continue to back up troubled utility ESKOM and keep the nation’s lights on.
“The ESKOM fiasco may be the straw that will break the back of creditors’ willingness to continue funding a country that hasn’t had its financial or governance house in order for decades,” Saxo said. “Other uncreditworthy emerging markets will be drawn into the abyss as well in 2020, with the most differentiated performance across EM economies in years. The country teeters toward default.”
6. Trump announces America First Tax
In this scenario, the US’ trade deficit with China fails to materially improve in 2020 and US president Donald Trump starts to fear a defeat in that year’s presidential election. To revitalise the protectionist agenda, the administration comes with the America First Tax.
“Under the terms of this tax, the US corporate tax schedule is completely reconstructed to favour US-based production under the claimed principles of ‘fair and free trade’,” Saxo Bank explained. “The plan cancels all existing tariffs and instead slaps a flat value-added tax of 25 per cent on all gross revenues in the US market that are sourced from foreign production.”
The consequence of this tax is a spike in US inflation, which leads to the US 10-year Treasury inflation-protected securities (Tips) yield rising to 6 per cent.
7. Sweden breaks bad
Under the seventh outrageous prediction, Sweden embarks on a massive programme to better integrate its immigrants and overstretched social services, which drives a huge fiscal stimulus and a steep rally in the krona.
However, this ignores a large and growing contingent of Swedes who question policy, threatening political stability, while the economy starts to suffer. Saxo said: “Sweden is now in recession and with its small open economy status is extremely sensitive to the global slowdown. This sense of crisis, social and economic, will create a mandate for change.”
8. Democrats win a clean sweep in the US 2020 election
Saxo Bank’s next scenario imagines that suburban women and millennials turn out in the 2020 US presidential election to “express their revulsion for Trump”. This causes a clean sweep for the Democrats as they win the popular vote by over 20 million, grow their control of the House and narrowly take the Senate.
“Medicare for all and negotiations for drug pricing bring a massive haircut to the industry’s profitability,” the analysts said. “Big healthcare and pharma stocks collapse 50 per cent.”
9. Hungary leaves the EU
Since Hungary joined the European Union in 2004, the country has been “an impressive economic success” but the relationship between the two parties has been strained since the EU initiated an Article 7 procedure against the country.
The basis for this procedure was Hungary’s tighter restrictions on free media, judges, academics, minorities and rights groups but prime minister Viktor Orbán has argued that this is necessary to protect its culture from mass immigration.
“It’s an unsustainable status quo and the two sides will find it tough to reconcile in 2020 as the Article 7 procedure moves slowly through the EU system,” Saxo said. “Orbán is even openly talking about how Hungary is a ‘blood brother’ with the renegade Turkey as opposed to a part of the rest of Europe, a big shift in rhetoric, a change of tone which coincides with EU transfers all but disappearing over the next two years.”
10. Asia launches new reserve currency in move away from US dollar dependence
The final outrageous prediction sees the Asian Infrastructure Investment Bank creates a new reserve asset called the Asian Drawing Right (ADR) in response to a deepening trade rivalry with the US and Asia’s vulnerabilities to the weaponisation of the US dollar and the US’ control of global finances.
“The move is clearly aimed at de-dollarising regional trade,” Saxo analysts said. “Local economies multilaterally agree to begin conducting all trade in the region in ADRs only, with major oil exporters Russia and the OPEC nations happy to sign up due to their growing reliance on the Asian market.”
With 1 ADR equivalent to 2 US dollars, the ADR is the world’s largest currency unit and the US is left stretched after a sizable chunk of global trade moves away from the US dollar. The consequence of this is the dollar weakening 20 per cent against the ADR and 30 per cent against gold, pushing the yellow metal’s price to “well beyond” $2,000 an ounce.