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Emerging Asian markets likely world economic weak points in 2014 – Saxo Bank
SAXO Bank financial analysts believe emerging Asian markets will become the world’s major economic weak points in 2014 – but despite the risks they are calling it “the beginning of the end of this crisis”.
That’s because emerging Asian markets generally managed to maintain fair growth throughout the Global Recession, but now the region is realising the imbalance of huge investment met by generals falls in rates of economic growth.
Research by Saxo Bank, the parent company of Australian online trading and investment arm Saxo Capital Markets, has some revealing trends in its first quarterly insight for 2014 that considers both the macroeconomic environment and individual asset classes.
Ironically, having maintained world growth at acceptable levels throughout the current crisis, emerging Asia is tipped to become the world’s primary weak spot in 2014.
According to Saxo Bank, investment in that region has reached a staggering 43 percent of Gross Domestic Product (GDP) while growth has fallen to barely 6 percent. Saxo Bank reasons that the “easy part” of the growth cycle is long gone, and some emerging market governments are now proactively trying to slow their economies down.
The report reasons this is not necessarily a bad thing for Asia, “which needs to cool off and reconsider its economic model”.
Europe, however, will be hit by the fallout of the troubles facing its best growth market for exports.
Beyond emerging Asia, Saxo Bank expects the global economy to accelerate from 2 percent growth in 2013 to 2.8 percent in 2014.
This uptick will be led by the US where private consumption and private investment will prove key drivers, pushing growth close to 3 percent. Tapering – in which the US Federal Reserve slows its injection of new money down from its monthly highs of about US$83 billion per month – will continue as the economy strengthens, which would imply an exit from so-called Quantitative Easing (QE) in the second half of 2014.
Saxo Bank believes the Eurozone is on the mend and likely to see growth move into positive territory of 0.8 percent in 2014, but the outlook for Germany and particularly France remains bleak, the latter having failed to spur growth outside increases in public spending.
The two year decline in inflation across the Eurozone is unlikely to reverse meaningfully this year and the argument for additional European Central Bank (ECB) easing is valid, the Saxo Bank report said – most likely through a new long-term refinancing option (LTRO), which is the ECB’s method of pumping money into the economy through extremely low interest loans to Eurozone banks.
Saxo Bank chief economist, Steen Jakobsen said, “It’s been a long time since the stars of macro indicators have aligned so perfectly.
“The good news? This is the beginning of the end of this crisis.
“The 2014-2015 period will see a transition away from quantitative easing and easy money towards better quality growth and, hopefully, a mandate for real change. The world has become so out of balance that things can only improve from here.”
EQUITIES FOR CAPITAL GROWTH
Saxo Bank’s head of equity strategy, Peter Garnry underlined in his report the continuing importance of investors holding equities in 2014 to realise “any meaningful capital growth”.
He said the relative repricing between equities and bonds would continue in 2014 as total return in equities relative to bonds remains below the equity risk premium line since 1995.
“Don’t pay any heed to those who say equities are in a bubble,” M Garnry said. “If you really want to make the most of your portfolio in 2014, the biggest risk is not being long enough on risky assets. ”
Saxo Bank forecasts a 10 percent overall rise in global equities over 2014. Its top equity picks for 2014 include General Electric, Microsoft and BNP Paribas.
Foreign exchange (FX) markets seem to be assuming the Federal Reserve will adopt a slow and steady approach to decreasing purchases, so Saxo Bank anticipates a higher US dollar (USD). However, it warned, if markets lose their nerve the USD strength could shift more prominently against the less liquid G10 and emerging-market currencies rather than the Japanese Yen (JPY) and other major currencies.
“Q1 (first quarter of 2014) will see a concerted effort to wean the FX market off QE, said John J. Hardy, Saxo Bank’s head of FX strategy.
“The Eurozone could prove a flashpoint, with the peripheral economies ready to rebel if the ECB doesn’t take stronger steps to expand its balance sheet.”
Saxo Bank’s top FX trading themes for Q1 2014 include long USDCAD, long USDJPY and long GBPNZD.
COMMODITIES FACE TOUGH YEAR
The Saxo Bank report tips another tough year ahead for commodities, with the risk of even lower prices still a possibility – an ominous sign for Australia and largely due to a decline in demand in Asia.
Saxo Bank reports demand growth has stabilised as economic growth rates in emerging economies, not least China, have declined.
The energy market will have to deal with the possibility of global crude oil supply exceeding demand for the first time in recent memory, thanks in part to the rise in non-OPEC production, and the average price of Brent crude is likely to move lower towards US$105 per barrel.
After 2013 saw gold’s first annual loss in 13 years, Saxo Bank is cautiously optimistic for its prospects later in 2014 after averaging US$1,225 USD per ounce during the first quarter.
“Raised growth expectations at the beginning of the year carry the risk that investors will once again become too optimistic about the prospects for higher prices, especially in crude oil and industrial metals,” said Saxo Bank head of commodity strategy, Ole S. Hansen.
“Strong January performances over the past three years could therefore be repeated only to be retracted later in the quarter,” Mr Hansen said.
Saxo Bank’s Q1 2014 Quarterly Outlook is available at:
http://storage.saxobank.com/TradingFloor/TradingFloor_Insights_Q1_2014.pdf
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