Hungary copies the UK in leaving the EU, while investors find oil more profitable than clean energy.
At the end of the year, investors are treated to a flurry of outlook predictions for the year ahead. Predicting the future direction of financial markets, however, is fraught with difficulties. For some, it is a fool’s errand; for others it is an often futile but necessary exercise for trying to consider the full range of possibilities that lie ahead.
Saxo Bank takes the latter view, publishing a series of “outrageous” forecasts every year. These predictions, the bank says, are not expectations of what they actually believe 2020 will bring. Instead, they are a mental exercise, intended to allow for the “consideration of the full extent of what is possible, even if not necessarily probable”.
Below we take a look at a select few in more depth.
UK nominal growth doubles to 8%
The UK economy has lagged ever since the 2016 Brexit referendum. Christopher Dembik, head of macroeconomic analysis at Saxo Bank, however, predicts the UK’s fortunes reversing following a victory for Boris Johnson and the Conservative Party at the 12 December general election – but in an unexpected way.
With a strong mandate, Johnson leads the UK out of the European Union (EU) on 31 January. However, the UK economy show sings of weakness and appears to be on the brink of a recession as post-Brexit uncertainty remains. “On the top of that, there is a growing discontent among the population, particularly among Brexiters, regarding the rise in gross inequalities in the country,” says Dembik.
As a result, to the shock of many, the government decides to embrace the ideas of ‘modern monetary policy’ (MMT) in a bid to restore confidence, as well as boosting GDP and investment.
“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,” says Dembik.
This sees the public deficit growth rise to 6% of GDP. However, says Dembik: “To everyone’s surprise, post-Brexit Britain’s nominal growth goes from 3.5% to 8% 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.”
The European Central Bank hikes rates
New ECB president Christine Lagarde is largely seen as a continuation of the bank’s previous leadership, having previously endorsed negative interest rates and loose monetary policy.
However, in an unexpected turn of events Dembik forecasts the new president rejecting the negative rates regime, declaring that monetary policy has overreached its limits. Dembik says: “She points out that maintaining negative deposit interest rates for a longer period could seriously harm the soundness of the European banking sector.”
To try and force euro area governments, particularly Germany, to step in and to use fiscal policy instead to stimulate the economy, the ECB hikes rates eventually into positive territory.
Markets, however, react positively. Dembik says: “As the EU simultaneously warms up to fiscal expansion, the market reaction is surprisingly positive, and EU banks are among the best performing sectors in 2020.
Hungary leaves the EU
Hungary has been a member of the EU for 15 years. However, says Steen Jakobsen, chief economist at Saxo Bank, the country’s relationship with the union has become increasingly tense in recent years, with the EU accusing Hungary of not respecting the rule of law, democracy or EU values.
As a result, Hungary follows the UK and puts itself on the path of leaving the EU by the end of 2020. This will see the EU grants upon which Hungary has become heavily reliant disappear. This leads to the forint weakening and EU companies reconsidering investment in the country.
Hungary, meanwhile, decides to shift its foreign policy focus eastwards, becoming closer to Turkey.
Investors realise oil is still more profitable than clean energy
While 2019 experienced the “Greta Thunberg effect,” with fund managers and investors supposedly re-evaluating the ethics of their portfolios in light of climate change, 2020 will see fossil fuel popularity roaring back, says Peter Garnry, head of equity strategy at Saxo Bank.
He notes that fossil fuel companies have been in the doldrums since 2014, the result of the shale-gas boom in the US depressing global oil prices. Added to this was growth of ESG investing, with some investors shifting out of fossils fuels on the back of climate change concerns.
He says: “The combined forces of lower prices and investors avoiding the black energy sector has pushed the equity valuation on traditional energy companies to a 23% discount to clean energy companies.”
On such a discount, however, the sector looks like a bargain and is primed for a comeback. There will be several catalysts for this, Garnry says: “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.”
But not only will oil and gas industry become a winner sector in 2020, the clean energy industry will face serious trouble. Garnry says: “Investors must realise that for clean energy companies, the average return on invested capital versus the weight-adjusted cost of that capital is a terrible 0.5, meaning that the industry is actually destroying capital.”
Saxo Bank 2020 Outrageous Predictions:
1. UK nominal growth doubles to 8%
2. The sudden arrival of stagflation rewards value over growth
3. ECB folds and hikes rates
4. In energy, green is not the new black
5. South Africa electrocuted by ESKOM debt
6. US President Trump announces America First Tax to reduce trade deficit
7. Sweden breaks bad
8. Democrats win a clean sweep in the US 2020 election, driven by women and millennials
9. Hungary leaves the EU
10. Asia launches new reserve currency in move away from US dollar dependence
A full explanation of Saxo Bank’s Outrageous Predictions for 2020 can be read here.