If only we had a crystal ball to look at how the global markets would fair in the year ahead. Each year Steen Jakobsen, Chief Economist at Saxo Bank releases his ‘Outrageous Predictions' for 2014. Joanna Andrews looks at some of the highlights.
Political turmoil in Europe, deflation in the US – and a crash in oil prices to $80 a barrel. These are just some of the outrageous predictions for the year ahead. Oh, and throw in the possibility of the bursting of the tech bubble!
In his report Steen Jakobson - a well known and respected analyst - lists 10 scenarios that he believes investors should be aware of. He points out that these are not Saxo Bank’s ‘official’ calls for the year ahead, but rather an exercise to make people aware of the risks to capital preservation and prepare them for the worst case scenario before making an investment decision.
"This isn't meant to be a pessimistic outlook,” he says. “This is about critical events that could lead to change - hopefully for the better.”
Steen Jakobsen’s annual predictions have become a bit of a year-end tradition in trading circles. The outrageous predictions may go out on a limb to suggest ‘black swans’ or unlikely market events, but they could prove true.
He warns, “The world is as lopsided as it has ever been in terms of wealth and income distribution… 2014 could and should be the year in which a mandate for change not only becomes necessary, but is also implemented."
Topping the list is a Soviet-style economic model for Europe. Jakobsen says he sees a worrying trend of weak consumer prices that will continue along with the lack of Euro Zone growth. This will lead to the European Commission to table a working group that will focus on different wealth taxes for anyone with savings in excess of $100,000.
"It will be the final move towards a totalitarian European state and the low point for individual and property rights," he says."We have gone full circle back to a Soviet Union model."
But it is the political turmoil in Europe he fears that is at the forefront of his mind. He says it is likely to reach boiling point after the European Parliamentary elections in May. "Sweeping the traditional political groups out of power, the new European Parliament chooses an anti-EU chairman and the European heads of state and government fail to pick a president of the EC, sending Europe back into political and economic turmoil."
Other extreme predictions include a recession for Germany and zero growth in the US due to interest rate rises and a lack of wage increases. Jakobsen believes the world's central banks and government policymakers are running on empty and avoiding proper reforms that will boost their economies. “Instead, they have been reduced to ‘talking the market higher’ or simply going to church to pray for better times ahead.”
He also predicts a “nasty hangover” for tech stock like Amazon, Netflix, Twitter, Pandora Media and Yelp. “The US information technology sector is trading about 15 per cent below the current S&P 500 valuation,” he says. “However, a small group of technology stocks are trading at a huge premium of about 700 per cent above market valuation. These 'fat five' present a new bubble within an old bubble thanks to investors oversubscribing to rare growth scenarios in the aftermath of the financial crisis”.
As for the oil market – watch out for an oversupply, he says. “The global market will become awash with oil thanks to rising production from non-conventional methods and increased Saudi Arabian output. For the first time in years hedge funds will build a major short position, helping to drive Brent crude oil down to USD 80/barrel.”
As Jakobsen points out, the probability of these events happening are quite low however, they have been deduced strategically by Saxo Bank's analysts based on "a feasible - if unlikely - series of market and political events."