Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 01 July 2016 at 10:00 GMT

Investment Outlook: 50 ways to leave your lover

CIO / Saxo Private Bank
  • Brexit vote shatters UK political class, European consensus model
  • Culturally, pushback against globalisation, technological change rampant
  • Current era reminiscent of the 1970s, but markets are actually far stronger
  • Fear aside, well-balanced portfolios will continue to include risky assets

The afterglow of the Brexit vote continues to shine on safe-haven assets but the ballot's true import may lie in what it says about globalisation and its discontents. Photo: iStock

By Teis Knuthsen

Some will regard the outcome of the British vote on the country's European Union membership as a victory for regional populism, and as the very antithesis of the fall of the Berlin Wall in 1989.
Others see the referendum on 23 June as an important step towards a more liberal and decentralised Europe, and as an inevitable protest against a political leadership that has blatantly failed.

No matter how you approach it, it should be obvious that support for further global integration is waning, perhaps even collapsing. Brexit is then just another indication of how many things have changed in the years after the financial crisis. Global trade is slowing (a trend fuelled by political as well as technological change), global ambitions are becoming more local, and military tension is increasing.

It is thus clear that this decade is developing quite differently from the 1990s and '00s. In the '90s, we benefitted from both a significant peace dividend after the Eastern Bloc disappeared as a threat and the first part of the wave of globalisation. The '00s included "globalisation wave 2.0" and a debt-financed spending spree.

Back to the '70s

Times are different now. Negative interest rates are perhaps the ultimate sign that we have lost faith in the future, and Western workers now understand better that globalisation also means an erosion of national labour markets. Finally, the neoconservative dream of spreading democracy and Western cultural values has been met with significant pushback, not only by Russia but also in Asia and the Middle East.

Ironically this decade has several parallels with the 1970s: an oil crisis (in reverse), inflation (ditto), problems with the Middle East, and fear (environment, war). As in the '70s, international policy coordination is not smooth.

The '70s
Back to the future? Photo: iStock 

Common to both decades is also an underlying technological revolution, where the IT-chip from the early '70s would later pave the way not only for the dot com era in the '90s, but also for the opening up of the global economy, for example by allowing IT services to be outsourced to India. Today we talk about digitisation, robotics, artificial intelligence, and 3D printers.

It is naive not to have an eye for the big change, and at least one should take note of just how poorly equity markets performed in the '70s. However, in many ways the global economy is performing better than most seem to think. 

Take the US, for example. Unemployment is below 5%. Manufacturing production (excluding energy) is at an all-time-high. So are retail sales and car production. Housing prices are less than 10% from their peak at the height of the 2006 bubble. And bank credit is rising by 8% year-over-year. 

If this is a crisis, I would like to see what you consider a boom.

Little England versus Great Britain?

Back to England. The country is now in a complete political vacuum after prime minister David Cameron announced his departure without initiating an Article 50 withdrawal from the EU. A new leader of the Conservative Party can be expected in early September, and only thereafter a new government will be formed. 

A formal start to negotiations with the EU now seems unlikely before the end of the year. At the same time, a majority of Labour MPs have expressed a lack of confidence in party leader Jeremy Corbyn, and this party is divided as well.

In the short term, England vulnerable to a possible crisis of confidence that will be augmented by twin deficits on the current account and public budget. A short recession cannot be ruled out and it seems obvious that the Bank of England will ease monetary policy further. 

In the long term, much depends on exactly what agreements can be negotiated with the EU, as well as the extent to which the United Kingdom itself may fragment.

For the EU this is a major political crisis, and if the English vote is not accepted at face value as a genuine desire for change that is shared in many countries, it could ultimately lead to the union's collapse. The next big test is in October with a vote in Italy for political reforms, but 2017 also offers the presidential elections in France and elections in Holland and Germany.

One can only hope that the EU responds by fading federal ambitions in favour of greater decentralisation, a greater focus on the original values of the EU, and a constructive approach to negotiations with the UK. Additional stimulus may be in store from the European Central Bank.

Cycle turns up

My short-term cyclical model is gradually moving towards a genuine recovery cycle. This comes from the combination of two factors: first, because last year's significant energy price shocks now have somewhat subsided, partly because we have moved through a traditional inventory cycle. 

All things being equal – that is, without considering any confidence decline in the wake of the British vote – the coming months should offer additional signals for a re-acceleration in global growth. 

"All things being equal" may prove to be a positive outcome this time, however, particularly because China once again seems to be decelerating.


Political as well as economic uncertainties are solid arguments for a defensive investment approach. But if you are looking for defensive asset classes, the first problem is that the expected return is at best zero – and this before inflation is deducted. 

A five-year Danish government bond now has a negative rate of minus 0.3%. A 10-year bond has an interest rate of just 0.13%, and at maturity you will have received a total return of less than 1.5%. Before inflation and taxes, that is.

The next problem is that the expected return quickly becomes quite negative. Should, for instance, the yield on a Danish 10-year bond rise by just 0.05%, then a whole year's income is lost.

This is where TINA – short for "there is no alternative" – comes to the pitch. There are now no reasonably safe assets that can protect the purchasing power of your investments, let alone deliver positive real returns. 

No matter how much you fear the current market turmoil, I think you have to maintain an investment strategy that includes risky assets. First and foremost, this means equities, where I continue to overweight the defensive end of the market (low volatility). But it also means that one should consider bonds outside Europe, for example US high-yield bonds that have considerably higher yields after last year's energy-driven rise in interest rates, and government bonds from emerging markets. 

Finally, you may want to include gold – whether directly or through gold companies – as an alternative to money in a world of negative interest rates.

Ultimately, however, all asset classes carry some measure 
of risk – even safe havens. Photo: iStock 

— Edited by Michael McKenna

Teis Knuthsen is CIO of Saxo Private Bank


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