Saxo Bank Quarterly Outlook: The Japanization of Financial Markets
on: October 1, 2009, 9:03 am
Saxo Bank predicts that monetary stimuli and government
deficits are likely to continue, fostering a "Japanization" of
financial markets, whereby the market will see higher price-to-earnings
ratios and lower yields on both corporate bonds and treasuries.
Chief Economist at SaxoBank, David
Karsbøl, commented: "Because Western economies are more flexible and able to
embrace the necessary changes, we do not think that things will get as bad as was
the case in Japan. However, it is increasingly evident that the current scenario in
the West bears a close resemblance to post-1990 Japan, and it looks progressively
like we have entered a new regime in which everyone assumes that large companies
will be bailed out. This means that default risk is 'priced out', and we see
higher price-to-earnings ratios and lower yields on fixed income."
In its fourth quarter outlook, the Copenhagen-based investment specialist predicts
that the American economy will return to positive GDP growth in the second half of
the year, but warns that the sustainability of this growth is questionable and will
be largely due to government spending and inventory restocking. US unemployment will
continue to rise over the coming months, and that this will further hinder debt
repayments and consumption.
David Karsbol believes a USD short seems to be a vote for the global recovery and
has become the, newer and better carry trade. "The very low US's yields and need
for external financing and increasing reluctance from China to buy greenbacks is a
toxic cocktail that could drive the currency even weaker in the near term," Karsbol
Looking towards the end of the year, market dynamics indicate a shift from this
year's equity market rally. Global equity markets rallied 59% from the March lows
through to August, and looking ahead, dynamics indicate a shift in performance
towards micro trends and sector-specific growth and valuation stories.
Karsbol added: "Most indicators of economic activity are stabilising, but at very
depressed levels. We believe investors should continue to take cyclical risk through
regional allocations, with particular emphasis on emerging markets over Europe and
the US, where it will be difficult to maintain and improve growth."
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