Talk is cheap. Especially in this environment. The number of “known unknowns” and “unknown unknowns” to use the words or Mr Rumsfeld, are large.
Therefore, I feel very humble trying to forecast anything next year and will suffice with the 1Q 2009.
1. The Usd.
As I expressed last week, I am still a believer in a strong Usd. Main reasons expressed in my Usd piece of earlier.
2. More Bearmarket rallies.
Think the institutional cash will get into equities at any rally attempt, pushing it further. With China and Russia´s equity markets having lost 60% and 70% respectively 2008 and with a bearish market consensus this should have a high likelihood of taking place.
3. Continued high asset market volatility
Despite the implied asset market volatilities having come off from their highs (barring interest rate volatilities), I expect them to pick up again next year. Main reason being the huge current asset dislocations still in place globally. The massively overwhelming, but still low precision state-driven measures and countermeasures are likely to increase these imbalances further. This will generate a circle of reallocations, keeping asset implied volatilities at a structurally high level.
Implied asset volatilities have come from a prolonged period of structurally very low volatilities, it is very likely we will see a period of the opposite.
4. Lower levels of global cooperation as fiscal pressures intensifies – welcome to a world of competitive devaluations
As recession/depression gets a stronger hold, governments will become more desperate as traction from monetary measures are not gaining foothold. The focus and awareness of fiscal stimulus measures will increase further. The competitive devaluation stimulus will be a very tempting bait for politicians and some are set to take it. In turn, this will decrease the integrity and resistance capacity on other governments and politicians.
This scenario is a very negative one but I unfortunately believe it has a high risk of happening. To comfort; All Centralbanks, Economists and Governments are very aware of this risk and will do their utmost to coordinate globally to prevent it from happening. IMF;S efforts to spew money around at the same time as they are not encouraging currency regulated currencies to depeg should be seen in this light… Stability everyone, stability.
5. I am bearish the CEE countries, Russia, Turkey and South Africa.
The main drivers will vary slightly from country to country of course.
A few ones I see as common and strong though;
Russia will have a very tough time even with the Oil price rebounding. This is due to the huge debt exposure in hard currency that the Russian corporates are currently running. (200 Bn Usd ish). With the currency reserves just north of 400 BN Usd and outflows still a very real risk, it is not very likely that the CBR will continue to defend the RUB as currencyreserves approach 200 BN Usd.
IMF should save their reserves and raise more capital (if they can), because that rainy day might just happen. Question is whether the CBR and Putin (yes, he runs everything) will be quick to ask the IMF for funds or whether they will let prestige rule.
For their sake, lets hope they do the former and then let their currency go. If you ask me, thats the most cost efficient way of doing it. Any currency regime in this environment is doomed to fail. You can keep it if you want, but the leadership mentality should then be more inclined to support leadership a la Mugabe style, ie not very sensitive to the suffering of the people and the economy.
In any case, dwindling domestic demand, too high short end rates (I believe we will see sharply steepening yield curves for these countries), too big loads of hard currency debt, a very difficult refinancing environment and sharply rising unemployment will push these currencies weaker.
South Africa might get some encouragement from a non soft or even biddish gold price, but doubt that will be the driving variable. Overall weak commodity prices (Ill leave oil out of that ) will not help.
6. The Baltics will continue to be under intense domestic pressure to devalue
The main factor holding it back will be the Scandinavian Banks applying strong pressure on the Swedish authorities and the Baltic ones not to. Together with certain local influental interest groups. A devaluation will bring hard pressure onto Scandinavian banks, with SEB and Swedbank in the main spotlight initially.
Swedbank have at least recapitalised themselves, albeit at quite a late stage. SEB should probably do the same, but are keeping their fingers crossed instead. Remember, this is NOT an issue about cashflow, purely about creditlosses, for now. Basically all banks globally have positive cashflows and a good underlying business. It is the money lend by the Banks that is the issue at hand. This issue has the capacity to sink many a Bank.
7. The SEK
The SEK remains the most undervalued currency of the G20 ones from any fundamental valuation perspective. We all know the reasons; high global asset market volatility, global balance sheet consolidation, where the SEK has been relatively overweight as an asset investment destination. The Baltics. This situation will most likely continue to generate a relatively volatile environment for the SEK and Swedish equities till the Baltic issue is resolved, discouraging investments into Swedish asset markets in the process.
Although fundamentally undervalued, I believe the Baltics issue and the impact it will have on the Swedish Banking system and Economy, will maintain the SEK;s weak bias vs the “hard currencies”.
8. Catching up from behind the curve – the NOK
The Norwegian Centralbank has, as usual, been behind the curve. question is whether they will close that gap soonish. Lets hope they will. the Norwegian economy will need all the stimulus it can get right now. With OIL and Shipping at its lows, they are probably the most vulnerable economy in Scandinavia right now. Quick fiscal stimulus measures will be the key here. The NOK following the SEK down should hopefully help. (Competitive devaluations?)
9. Staying WAY behind the curve – The ECB
At some stage during the 1Q, the ECB will have to cut aggressively, realising just how far behind the curve they are. This will sink the Euro, which is just what Europe needs. Expect massive political pressure on the ECB to do just that. Having said that, I do have a lot of respect for the ECB;s very complex task of trying to create a monetary policy for a cohort of countries that are really a mish mash with no real correlation to fiscal situations and thus, monetary policy needs. Maastrich is already out the window.
It is not easy, even, almost impossible task to run a coordinated monetary policy under those circumstances. Fingers crossed. Further out, the PIGS countries will blow this currency apart.
As always,
Good luck