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Saxo Bank: Capital markets are in a zombie-like state
19 April 2018 Copenhagen
Reporter: Jenna Lomax

Image: Shutterstock
Modern capital markets are in a “zombie-like state”, with low volatility and extreme valuations in all assets, according to Saxo Bank.

Saxo Bank was speaking in its Q1 2018 quarterly outlook for global markets and key trading ideas,which covered asset classes, such as foreign exchange, equities, commodities and bonds as well as tactical asset allocation models.

Saxo Bank said: “The key to success in tactical asset allocation is to identify the asset classes which relatively outperform during the different periods of an economic cycle.”

Anders Nysteen, quantitative analyst at Hoist Finance, said: “It is important in this environment to have a portfolio not just with ‘soft’ assets but to be prepared for sudden market changes with a more diversified portfolio including some of the ‘hard’ assets such as commodities, real estate, and emerging market exposure.”

He added: ”Saxo Bank’s forecast is that credit spreads will widen and the yearly change in gold prices will stay positive. However, the consensus is looking for credit spreads to remain low and not expanding much while inflation will pick up.”

Commenting on commodities, Saxo Bank said that investors will continue to see safety in gold, though the “turbulent turn that geopolitics took in recent weeks has had a severe impact on commodities”.

Ole Hansen, head of commodity strategy at Saxo Bank, commented: “Commodities got off to a strong start in 2018 but have since come under heavy pressure as rising trade tensions threatened to further undermine already slowing economic growth momentum.”

He added: “The focus on a commodity-supportive rise in inflation has also faded with current and forward projections not showing much sign of a pickup in global price pressure.”

Remarking on equities, Saxo Bank said the battleground in Q2 will be that of fundamentals against the outlook, in that equities are under pressure from a potential trade war to disappointing macro numbers and technology regulation.

The financial technology specialist said: “Caution is critical in such an environment and portfolio diversification and defensive choices therefore make sense.”

Peter Garnry, head of equity strategy at Saxo Bank, added: “Portfolios should be more balanced and tilted towards defensive industries in the portfolio’s equity exposure.”

Elsewhere, Saxo Bank said cryptocurrencies “fell back to earth with a bang in the first months of this year, having enjoyed exponential growth in 2017”.

However, the bank concluded that the situation “remains fragile, given the outlook to increased regulation and social media advertising bans. That said, we can’t rule out the possibility of a comeback”.

Jacob Pouncey, a cryptocurrency analyst, said: “If there is a significant pullback in the equity markets, there will be an inflow of money into uncorrelated assets, or assets that lie outside the reach of the traditional financial system in which cryptocurrencies are a potential alternative.”

Commenting on this quarter’s outlook, Steen Jakobsen, chief economist and CIO at Saxo Bank, added: “In our view, the implications of a global trade war and the world possibly having reached peak globalism have super-cycle implications.”

“On the interest rate front and due to the excess of central bank policy, we are likely about to see the end of the 35-year downward trend in interest rates, the price of money. At the same time, we have seen an information technology revolution in which technology companies have become monopolies of a size not seen since the 19th century, with their dominance of the market and downright scary data-gathering capacity more powerful than that of governments.“

“This is now changing with the European initiative to both enforce the General Data Protection Regulation and the 4 percent turnover tax applied to technology companies. This will reprice technology, as (at a bare minimum) growth is now taxed higher with more spending needed on data protection, which is not ‘sales’ but costs.”
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