India a bright spot on a deflationary Asia-Pacific market landscape: Saxo

Saxo Bank, the online multi-asset trading and investment specialist, parent company of Saxo Capital Markets has published its Q2 outlook for the global markets, revealing why it is bearish on the Asia-Pacific region, but is a major bull on India for the second quarter of 2015.

Although deflationary winds will affect the country, Kay Van-Petersen, Asia Macro Strategist at Saxo Capital Markets, said the structural positives and closed nature of the economy make the country an ideal place to be in a “zero rates” world.

“This is not about reinventing the wheel but about taking out, say 15-20 per cent of bureaucratic red tape, corruption and dams that have clogged the river that is India. Such a move would unleash a huge flow of economic growth and prosperity,” Mr Van-Petersen said.

Mr Van-Petersen points to India’s new Modi government’s reform agenda and track record of delivering on economic prosperity, its enviable demographics with over half the population under 25 years old, and its capacity to benefit from low energy prices.

On a global level, the current cycle of doing nothing meaningful by policy makers and central bankers except buying time has so far protected the stock market through expanding price-earning multiples, QE, buybacks, falling inflation and a lack of alternatives. But this strategy is coming to an end, according to the bank’s Q2 2015 outlook, paving the way for asset repricing and a period of zero or even negative returns.

Predicting a rupture with the past, Steen Jakobsen, Chief Economist at Saxo Bank, said: “The global market is closer to the Soviet Union in 1989 in its political and economic structure than to a freely traded market. The inability to move money from paper into the real economy remains the central issue and solution to the economic dilemma. The ECB’s move into negative rates in 2014 could turn to be the catalyst for change, especially since 35% of all European government debt is now trading at negative yield.

”If you are a company, it is difficult to keep sales volumes going up when your consumers are not taking part in the recovery. The conclusion should be that an economic system which does not allocate capital to the highest marginal cost of capital, and which continues to support the one per cent versus the 99 per cent ultimately comes full cycle to a point where the expected return of everything is zero again.”

Against this backdrop, the bank publishes its outlook for the market:

Commodities

The collapse of the oil price in the last six months has stunned the global economy with the implications of a near 50% fall in the major benchmarks still unwinding says Ole Hansen, Saxo’s Head of Commodity Strategy. This environment has left the market open for some contango opportunities in Q2, expectations based on the premise that prices will rise in the future, especially in the US market. In Q2, focus will be on restoring a proper balance between supply and demand of the black stuff.

Saxo Bank expects the gold price will continue to depend on the dollar, the direction of US bond yields and the timing of the first US rate hike with no major positive impact expected.

Macro

The tailwind from lower energy prices, a weaker euro, and an overall less weak economy result in a meaningful upward revision to euro area growth to 1.5% in 2015. “In the US, I maintain the outlook for growth of around 3% while I remain below-consensus with a 6.7% forecast for China”, says Mads Koefoed, Saxo Bank’s Head of Macro Strategy.

”There are plenty of event risks in Q2 waiting to raise volatility in the markets. The Greeks may find themselves with their backs against the wall again in late June and in the US, the FOMC is preparing for the first rate hike since 2004 with June and September the most obvious candidates.” adds Koefoed.

FX

In currencies, Head of FX Strategy John Hardy is looking for potential mean reversion in the extremes of NZD strength and SEK weakness in Q2. Elsewhere, the USD rally looks set to continue in Q2, though the pace is likely to slow significantly after the incredible advance of the previous six months. And the JPY outlook is a big question mark, as USDJPY has remained in a technical limbo in late Q1, which is the end of Japan’s financial year. GBP may stay under pressure as the elections approach in May.

Equities

Peter Garnry, Saxo Bank’s Head of Equity Strategy expects capital to be flowing again into Europe, amid an improved economic outlook, with equities set for their best start since 1995 and are already up 14 per cent year-to-date. One of the assets that has already benefitted a lot from the current trajectory of monetary policies and improving macro conditions is real estate, which is up 20 per cent this year.

Tailwind is the word for the European equities in Q2 and 2015 could likely be a déjà vu of US equities in 2013 when they rose 32 per cent. This means that European equities could return an additional 15 per cent on top of their impressive start to the year.