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Stargazing on the wild side

By Yazad Darasha



Predicting stocks, commodities and currency markets is usually viewed as a fool’s game. These are traditionally volatile and unpredictable markets and only the extremely courageous or the exceptionally foolhardy will venture into this domain.

Denmark-based Saxo Bank last year predicted equity markets in 2007 would take their cue from “the desolate spiral of US home sales, but could find relief in M&A deal flow”. Come 2007, the equity markets in the West stand battered by the sub-prime mortgage crisis and home builders in the US are looking for white knights to bail them out.

Saxo’s tradition of annual “Outrageous Predictions” has had a high rate of bull’s-eyes in the past. The bank’s analysts said in 2006 they’re oil bulls “given the raft of alarming geopolitical scenarios with alarming implications for global supply”. Crude this year tested an all-time high of more than $99 per barrel and looks set to cross the $100 mark.

Not satisfied with its prediction coming true, Saxo now believes crude will test the $175 mark.

Another bet was the prediction the US Federal Reserve would tighten monetary policy and bring the lending rate down to 4 per cent by the year-end. The rate stands at 4.25 per cent.

Here are Saxo’s Outrageous Predictions for 2008:

1. World oil prices to hit $175 even if growth slows

Much of the conventional wisdom on oil has been proven wrong over the past few years, as previously unimaginable new highs in the price of oil have only been a reflection of the strength of global growth, rather than an obstruction in its path. With the weak US dollar and shrinking profit margins for refiners, the end consumer in many places worldwide hasn’t noticed a difference between oil prices at $99 compared to oil prices at $75. Even if global growth slows in 2008, it will continue to move ahead in the emerging markets of the world where marginal energy demand is growing the most. As “peak oil” becomes an accepted principle and supply and demand do a nervous dance, the price risk in energy remains firmly to the upside.

2. UK economy likely to go into a nosedive
The British economy may go into a nosedive in 2008, weighed down by some of the same factors that have toppled the US. The UK housing bubble is possibly worse than the US bubble and has only begun to unwind. The Bank of England has dragged its feet as the credit crisis has unfolded, which could worsen the situation compared to the Fed, where “Helicopter” Ben Bernanke has replaced “Easy” Alan Greenspan. The UK consumer is even more overextended in terms of all forms of debt than his US counterpart.

3. S&P500 falls 25% from its 2007 high to 1,182
Why 1,182? That would be an exact 25 per cent drop from the 1,576 high the S&P500 index reached in mid-October this year. History shows that a stock market drops 15 to 30 per cent when housing markets fail. “Easy Al” and “the slice and dice any manner of junk and pass on the risk to your clients” investment banking paradigm triggered the biggest housing bubble in US history. The unwind from the height has already been severe, but it has further to go. So we are daring to forecast that the fall in the major US index will lie at the extreme end of the scale.

4. Grain prices to double again as demand rises

This year saw the most spectacular gains in the grains complex in recent memory as wheat prices doubled and soybean prices rose to levels not seen since the wild grain markets of the 1970s. Human population growth has slowed on a percentage basis, but per capita consumption of grain is accelerating as emerging markets switch to higher protein diets, which have a multiplier effect on the grain market. Every kg of beef requires seven kgs of feed, for example. Chinese meat consumption has also doubled per capita since 1990 and milk consumption has tripled since 2000.

5. Many of the big US home builders to go bankrupt

As 2007 draws to a close, many of the stocks for the largest home construction outfits in the US are rallying after George W Bush rolled out his desperate attempt to stem the sub-prime tidal wave by fiddling with rate reset mechanisms and implementing other measures, which seem like pumping medicine into a dead horse. These steps are too little and too late, as the last phases of the US housing boom were one of the worst examples of overextension by any industry – driven by excess liquidity. At least three of the largest US home builders could go bankrupt in 2008.

6. Chinese equities likely to see correction next year
The Chinese stock market bubble in 2007 saw one of the most remarkable accumulations of paper wealth in financial market history. The rise in Chinese equities is certainly due in part to solid fundamental underpinnings, including a liberalisation of markets and remarkable economic growth. But there are a number of factors we believe may have resulted in an unhealthy overextension in equity prices that could mean an ugly correction in 2008 – possibly around the psychologically important 2008 Summer Olympics in Beijing.

7. Ron Paul elected President of the United States

The most outrageous! One would imagine a party with the least popular president to inhabit the White House – ever – wouldn’t stand a snowball’s chance in Texas of getting a new candidate elected to the presidency. But Ron Paul is no George W Bush, even if he is a Republican like Bush and is from Texas like Bush. His libertarian, anti-war platform is about three standard deviations away from the platform of any other republican candidate — or even Hillary Clinton, for that matter. Paul’s share in the Republican candidate polls has rocketed from one to six per cent in the space of a few months and there is the best part of a year to go until the election. As should be clear from this year’s outlook, we are quite negative on the US economy in 2008. A general slowdown and stock market turmoil must increase the odds of a Ron Paul nomination as he has been the only candidate to speak about the budget, account deficits and the dollar crisis.

8. A stellar year ahead for Swedish kronor 

In 2007, the Swedish kronor was a currency of many stripes. First, it was on a weak footing as the carry trade was in focus, and its low interest rate attracted interest in selling SEK as a funding currency. Then the Riksbank moved rates to parity with the ECB and many speculated it could become an even higher yielder. But then a few weakish numbers from Sweden and a bout of risk aversion have put the SEK on a weak footing. But we believe 2008 could be a stellar year for the currency due to the government’s liberal-minded policies.

9. SGD to fall further before rising against US dollar

The beginning of the righting of global imbalances has meant a stronger Singapore dollar over the past year. The Monetary Authority of Singapore has allowed SGD to strengthen to help ease the pressure caused by strong capital inflows and inflation and as

the country registered robust growth rates. This process could continue for a while into 2008 and take SGD towards 1.4000, but eventually the currency could rise sharply as Singapore has already taken a large share of the necessary adjustment to reflect

global imbalances.

10. Hungarian forint rises to 275 against euro

The forint is on our watchlist of currencies that could really suffer if we see a slowdown in global growth and a move to risk aversion in 2008. Some analysts are looking for a stronger forint if the Hungarian Central Bank is forced to ditch the band it allows the HUF to trade in against the EUR. A slowdown in global growth could punish Hungary’s export-driven growth, while a lack of risk appetite could force the HUF to weaken in light of the country’s massive budget deficit. These factors could see EURHUF rise some 10 per cent from current levels to 275 in a hurry.