Saxo Markets publishes Q1 2020 Quarterly Outlook

Saxo Markets has released its Q1 2020 Quarterly Outlook for global markets, which includes trading ideas covering equities, FX, currencies, commodities, and bonds, as well as a range of central macro themes impacting client portfolios.

Steen Jakobsen, Chief Economist and CIO, Saxo Markets, said “For the first time since WWII we sense a shift in which climate and the environment – not growth – will become the priority of governments and their citizens, as shortages of food, clean water and air become existential questions.”

“The long-term reality is that the changing climate is telling us that the cost of the present ‘model’ of economic growth is turning negative. Not only at the margin, but probably full-blown negative in terms of the costs to society and the environment,” Jakobsen continued.

According to Saxo, climate crises such as the Australian bush fires are mobilising individuals, businesses and governments to fight climate change. The growing shift in policy and behaviour coupled with technological advancement lowering the cost of green technologies is making green stocks increasingly attractive but carry risks. Cyclical sectors such as solar, wind and EVs are likely to be more heavily impacted in a recession, while nascent industries such as fuel cells, bioplastic and food present more idiosyncratic risks. Green stocks have significant potential but investors should carefully weigh-up their investments.

Peter Garnry, Head of Equity Strategy, Saxo Markets, said “With millennials demanding action on climate change, we are sensing the beginning of a new period that creates great opportunities in equities. Governments will increase investments and subsidies for ‘green’ industries, starting a new mega trend in equity markets. We believe that these green stocks could, over time, become some of the world’s most valuable companies — even eclipsing the current technology monopolies as regulation accelerates during the coming decade.”

“Investors should consider tilting their portfolios towards green stocks so they don’t miss this long-term opportunity. Meanwhile, central banks and governments have decided to throw out the old playbook of not adding stimulus in the late stage of an expansion in which the labour market is tight. Both monetary and fiscal policy is readily being deployed in 2020 across all the world’s largest economies. This is not the time to be underweight equities,” continued Garnry.

Saxo also offered insights into the state of the US dollar, stating that it is a ‘tough one to turn’, and that the currency is looking resilient in Q1 2020 on the back of solid US economic performance in 2019.

John Hardy, Head of FX Strategy, Saxo Markets, said “The US dollar is starting off 2020 in resilient shape. It has defied expectations that the Fed’s turnaround over the course of 2019 and acceleration into year-end would have resulted in a far weaker currency, especially considering that it has outpaced the easing from central banks elsewhere.”

“Why the US dollar has not weakened perhaps speaks to the residual strength in the US economy relative to global peers. While its manufacturing sector has suffered under the weight of Trump’s tariffs and a slowdown in US shale oil and gas development, the dominant services sector remained resilient and Trump’s aggressive trade stance saw US trade deficits narrowing sharply in the second half of 2019,” he continued. “Many of the USD-positive drivers noted above look well entrenched as 2020 gets under way, but we still look for a low ceiling to what has effectively been a flat US dollar over the last 18 months. As the year wears on, we would look for a slowing US economy, a related chopping of US interest rates, ongoing Fed monetisation of US budget deficits and, not least, the US presidential election to weigh on the US dollar’s prospects.”

Saxo also went deeper into the increasing impact of climate change, both from an environmental and a behavioural perspective. The firm advised in a press release that climate change is driving volatility and having a significant negative impact on Asian cities, naming the risk factors of floods, droughts and wildfires, which may increase the region’s populations’ demand for sustainable companies and supply spurred through government action on climate change.

Kay Van-Petersen, Global Macro Strategist, Saxo Markets, said “It seems like each year volatility in temperatures, seasons and weather become more extreme. In Asia for example, mega-cities such as Jakarta are now at risk of sinking and Delhi experienced freezing temperatures in December. Climate disasters tend to act like volatility in the markets, whereby volatility begets more volatility. One disaster raises the probability and potential magnitude of another type of disaster.”

Van-Petersen continued, saying that “This increasing volatility is driving at least two key structural driving forces. The first will be demand driven. More and more consumers will want to use their spending capital to vote for companies that practice sustainability. For instance, probably about 5% of the US’s 330 million people are currently vegetarians, but that ratio that is likely to grow. Companies and entrepreneurs that are proactive with regard to consumer sustainability lifestyle choices will thrive and move ahead. The second will be supply driven. Governments are coming to fully understand that we are likely past the tipping point where the cost to do nothing with regard to sustainable growth is much greater than the cost of addressing it now. To put it another way, governments need to be proactive on the climate crisis - spurring innovation, R&D and investments through subsidies, grants and tax breaks.”

The increasingly prominent climate consciousness of Europe, says Saxo, fuels public acceptance of more active fiscal and monetary policy, as we see foundations for the implementation of a massive monetary and fiscal climate package and political change being laid by the ECB in 2020.

This shift should be reinforced by national governments as climate change influences political choices – as a result, Saxo also think that Germany turning green will be the main political gamechanger in the coming years.

According to Saxo, as we begin 2020, we are on the cusp of an inflection point where the economic and environmental losses and social impact of maintaining the status quo are unsustainable. While pressure mounts, climate action could be one of the most transformative and disruptive challenges faced by the global economy.

Eleanor Creagh, Market Strategist, Saxo Markets, said “Creating a sustainable finance ecosystem requires a huge reallocation of capital. Investors and corporates who do not gear their portfolios towards more sustainable business models risk facing large losses in the coming decades: regulatory changes could leave many current operating models unviable. Over a third of global capital already has some form of ESG mandate, putting many companies and countries on the wrong side of that mandate on the backfoot. If companies fail to adjust, they will cease to exist.

“The green transformation will also drive many positive advances as the need for adaptation spurs the adoption of policy solutions aimed at funding clean energy projects, water security, sustainable infrastructure developments and green technological innovations such as emissions capture and energy storage breakthroughs. These new climate industries not only provide jobs and economic gains but also generate a positive impact by providing cleaner air, preserving delicate ecosystems and improving human health. The climate crisis is defining a future generation, and as the cohort of millennial and Gen-Z investors grows financial performance will no longer be the only investment goal, increasing demand for positive impact investments that align with broader sustainable objectives,” Creagh added.

To find out more about Saxo’s Q1 2020 Quarterly Outlook, click HERE.