Q2 2014 in­vest­ment out­look

Business First - - NEWS -

Saxo Bank, the on­line multi-as­set trad­ing and in­vest­ment specialist and par­ent com­pany of Saxo Cap­i­tal Mar­kets, has pub­lished its sec­ond quar­terly in­sight for 2014, fo­cus­ing on the out­look for Europe.

Euro­pean out­look: A United States of Europe? Fol­low­ing an abun­dance of false starts, the Euro­pean econ­omy is likely to en­counter fur­ther chal­lenges in Q2, Saxo Bank writes in its sec­ond quar­terly in­sight for 2014. By the end of the sec­ond quar­ter, the Euro­pean Cen­tral Bank is likely to grow in­creas­ingly con­cerned about de­fla­tion and the lack of growth and sig­nal new quan­ti­ta­tive eas­ing and yet an­other set of un­con­ven­tional mea­sures.

As well, Europe faces its big­gest elec­toral chal­lenge since the 1970s, as the re­al­ity gap be­tween Europe’s vot­ers and their EU-friendly politi­cians is wider than ever. At the May EU par­lia­men­tary elec­tions, look for EU scep­tic par­ties to form one of the largest over­all blocs in the new Euro­pean Par­lia­ment. If Brussels lis­tens to vot­ers, it could mark a de­ci­sive turn­ing point for the fail­ing EU ex­per­i­ment, even if for now, the po­lit­i­cal sta­tus quo is more likely to main­tain the up­per hand.

While the eco­nomic out­look ap­pears to be im­prov­ing for Spain, Por­tu­gal and Greece, this is re­ally part of an in­ter­nal trans­fer of prob­lems from these ‘Club Med’ coun­tries to France and soon Ger­many, which is likely to flirt with re­ces­sion by the end of the year. France and Ger­many are also likely to suf­fer from re­duced ex­ports, par­tic­u­larly in the lux­ury goods sec­tor, as Asian growth cools.

Steen Jakob­sen, Chief Econ­o­mist and CIO for Saxo Bank, com­mented: “The EU mem­ber coun­tries have sur­prised with their po­lit­i­cal sol­i­dar­ity over the last few years of the EU cri­sis, but the elec­torate is grow­ing rest­less and EU-scep­tic par­ties are mak­ing huge in­roads that the es­tab­lish­ment must recog­nise. Be­side this we have the eter­nal prob­lem that the EU en­tirely lacks an eco­nomic foun­da­tion that is sound and long term. Here in early 2014, EU com­pla­cency has never been higher, just as real po­lit­i­cal and pop­u­lar en­tropy is about to make its pres­ence felt.”

Global out­look: a ‘state of flux’ The ‘Frag­ile Five” (South Africa, Brazil, In­dia, In­done­sia, Turkey), which with the re­cent ad­di­tions of Ar­gentina, Rus­sia and Chile have be­come the “Frag­ile Eight”, are now in the process of re­bal­anc­ing, as the Fed ta­per­ing has forced their cur­ren­cies weaker and re­quired pol­icy tight­en­ing that will crimp growth and right the struc­tural im­bal­ances that have grown in re­cent years. This “state of flux” is a pos­i­tive de­vel­op­ment over­all, but too many coun­tries and economies are try­ing to do the same thing si­mul­ta­ne­ously – de­value and in­crease ex­ports – so growth is likely to weaken struc­turally and cycli­cally due to prior credit ex­cesses.

As Jakob­sen points outs, “We have been so fo­cused on sav­ing the world, the banks and the po­lit­i­cal sys­tem that we have un­der­in­vested in people, ed­u­ca­tion, in­fra­struc­ture, in­no­va­tion and tech­nol­ogy.

“It will not be the Euro­pean Par­lia­men­tary elec­tions that make or break the EU, but how the pol­i­cy­mak­ers and their trusted man­darins re­spond to the slow­down and sub­se­quent re­bal­anc­ing of the world.”

Key points on in­vest­ments for 2014: Fixed in­come: core govern­ment bonds will be the only as­set that is up Q1 2014 ver­sus Q12015 (re­bal­anc­ing and lack of pro­duc­tiv­ity).

For­eign ex­change: EURUSD will peak at about 1.4000/1.4050and then turn down to 1.2500 (the ECB should get ac­tive on de­fla­tion over the sum­mer). USDJPY could see 95.00 on a VAT hike and ini­tial signs of Abe­nomics fail­ing. The “Frag­ile Eight” will drop an­other 5 per­cent. Com­modi­ties: will do well through Q2 as real rates will drop, but could fall again head­ing into H1 2015.Will take profit in Q3 2014.

Eq­uity: The S&P 500 will peak at about 1,9001,950, then a 30 per­cent cor­rec­tion. Eq­ui­ties are the only as­set not yet hurt by the chang­ing eco­nomic cy­cle.

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