Global Recovery On Life Support

Global recovery on life-support Saxo Bank Research Note

September 3, 2009

Chief Economist David Karsboel

As I argued in yesterday’s “Where is the pent-up demand?” private consumption is going to disappoint in the coming quarters, if not years. That doesn’t mean that we can’t have growth. The OECD might even be right in assuming that growth is coming back in Q3 on a global basis. At the ECB press conference today, Trichet also revised the 2010 growth expectations higher to an interval of [-0.5 to 0.9] from [-1 to 0.4]. However, this is still miserable and hardly covers the population growth. It is also important to recognize that the government stimulus to GDP growth in the US currently is “as good as it gets” by contributing around 3% (annualized) in Q3, while the contribution drops to half that in Q4 – and yet they still didn’t manage to produce positive growth in Q2! The positively revised growth forecasts also beg the question: what would happen to the financial system, if the guarantees and increased limits for deposit insurance were rolled back? What would happen if mortgage origination in the US suddenly was to happen on purely market conditions rather than on government sponsored standards that are currently even worse than at the fraudridden months of the housing market top in 2006 and 2007? To this observer it seems clear that the TED spread would explode and that half the financial system would implode overnight. Asset allocation wise, our Global Business Cycle Indicator has turned. It is not yet positive, but at least it isn’t showing a worsening deterioration: Saxo Bank Global Business Cycle Model

World GDP Growth Per Capita 4 3 2 1 0 -1 -2

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-3

Most of the 260 economic indicators in this index are still showing significantly negative YoY contributions. That is why the indicator is still in considerably negative territory. The fact that governments are stimulating heavily and that the indicator is now rising almost as rapidly as it was falling a year ago, make positive QoQ annualized growth possible in Q3. We cannot ignore this turnaround from an extreme bottom in economic activity. The shipping market and trucking/railroad activity are still not impressive, but things might be improving from here. That is why we must begin thinking about how to position ourselves towards global growth. I have underscored global growth, because we think that the US and Eurozone growth will be negligible going forward. When looking back at the past decade, one has to wonder if we have been living in a fantasy world where the laws of economics (or mathematics for that sake) have been completely ignored in asset markets. We are now entering an asset allocation regime where the question “who can burn off the most debt-financed consumption in the shortest time” no longer carries the same weight as in the past decade and where the winner in such a contest is not automatically getting rewarded by handsome treasury purchases from hardworking populations in Asia. It is about time that the capital flows the other way: to the hard-working, fast growing nations where the marginal utility of the capital will be highest in the longer term. In other words, when allocating capital we want assets that are in general exposed to global growth ex US and ex EZ. Looking at price/book ratios, emerging markets actually look historically cheap – even after the rally. In general Price/Earnings are low and dividends are decent.

Don’t put all your eggs in one basket. We still recommend keeping the majority of your portfolio in fixed income and we are definitely worried about how much positive news is being priced into Western stocks.

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