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28 March 2024

Protectionist attitude and lack of regulation may delay recovery of the global economy

Ashraf Al Amra (SUPPLIED)

Published
By Shashank Shekhar

Steen Jakobsen, Chief Investment Officer (CIO), Saxo Bank, believes the stagnant world economy will make a turnaround in 2011.

He, however, cautions that if governments introduce protectionist policies with their revival packages it might take longer – may be even 2013.

When the global economy does recover, the structure of financial institutions, such as banks, will be much different from today, said Jakobsen.

Saxo Bank recently came up with 10 predictions for 2010, all of which it termed "outrageous".

Among other things it said there will be a revolution in Iran in 2009 as the purchasing power of Iranians declines.

The bank said crude oil will average at $25 barrel this year. It also said commodities markets were heavily manipulated in 2008 to show excess demand.

Terming the 2008 rally in equity markets as the largest ever, the bank said the prevailing bearish trends in markets across the world is because "bear markets do tend to overshoot significantly when correcting downwards given the preceding upside overshoot was significant in size".

In its 39-page report the bank even targeted activists working for a greener world and said the world should stop worrying about climate change in 2009 "as the climate is always changing" and because "global cooling is just as likely".

Jakobsen, who was in Dubai to make a presentation on the bank's forecast for 2009, spoke to Emirates Business. Excerpts from the interview:



What returns on capital do you see in 2009 and the next few years if sensible investments are made?


I would say that it will range between minus and plus three per cent. The situation is grim not only for 2009 but for the next two to three years.

Which are the investment segments you expect higher returns from?

Selected segments of the private equity market, pharmaceuticals, utilities, such as water and mining, are the ones that can bring good returns. Mining is a particularly interesting segment for investment considering that, in certain cases, the total value of asset below the ground [minerals] is thrice the value of the company. People need to be careful before they invest. They need to understand every aspect of an investment vehicle. And this will make the role of investment specialists all the more important.

Considering the prominent differences in economic establishment that the crisis has exacerbated, what changes do you see in 2009?

I think the most visible change will be in banks. They will cease to be "one-stop" shops. Then, there is also a possibility of several banks being nationalised. That would certainly bring a lot of change.

There will be a change in the way we get returns on our capital. There will be low returns from low risk investments. We have reached a point where if there is no risk the return on investment will also be zero. High returns will come from high-risk investments. The crisis will bring a lot of changes in the investment banking profession. Furthermore, major economies, such as the United States and China, will undergo a change in the way they operate. China needs to import from the rest of the world to help the world economy grow. The US will not remain a consumer driven economy.

What parameters of economy should the investors consider before investing?

Holistically speaking, there are five parameters through which we can understand when the world's economy is on the path of improvement. And therefore, how safe the environment is to invest. People should look towards China when studying return on investments. If China grows this year, it can still stimulate the world economy. The effect of unemployment on an economy is still understated. If the unemployment figures drop we can know the economy is improving. We are still in the winter phase of the economic cycle and that means we will take longer to emerge out of the crisis than we admit. People need to realise that [US President Barack] Obama's economic plan is more of hope than substance and should look into the economic indicators of the US. And last but not least the investors should not expect much from Europe, which is destined to collapse into a recession.

Battered by the crisis, the West now expects Asia, especially China and India, to fuel demand. Do you see that happening?

China is going to disappoint as far as growth is concerned. The official Saxo bank forecast for Chinese growth in 2009 is zero per cent. However, the Asian giant still is a dark horse. Over the past two years, the average money supply growth in China has averaged 16 per cent. The whole economy has become way too dependant on debt-financed US consumption, which has come to an abrupt halt. And the Chinese do not have another plan. So we should wait and see what will happen in China this year.

It's true that the next flow of demand needs to come from Asia. It's the people in China and India who still have the savings who need to spend to stimulate the economy. The West has lost its confidence to spend.

What about the GCC and the Middle East? How do you see this region shaping up after the crisis is over?

If this region wants to grow as a financial hub and a safe place for investments, it needs to open up for investments. More regulations need to be put into place to win foreign investors' confidence. Even though the capital markets have come under criticism, they remain a solution. The Gulf states may have their own capital but they need to have a mixture of foreign capital and local capital for a healthy economy. These countries, however, remain a good destination for investments. Protectionism may bring harm.

I believe that the crisis has brought some investment opportunities for these countries. They should be making deals with the governments in West and they should finance their deficits. Among all the institutions being bailed out, when we take the debt write-downs aside, whatever is left has a unique investment opportunity.

When do you see the world economy recovering from the crisis?

The year 2011 is a valid expectation considering the deep nature of the crisis. However, it may last longer, if the policies adopted are not right. It may continue until 2013 in case the protectionist attitude continues to be adopted. And the fear is that the governments are indeed adopting protectionist attitudes. "Buy American" is a protectionist slogan. Countries in Europe and Asia are becoming protectionist too.

At what stage of recovery are we now?

I would say that the recession is still continuing. We are still on the way to reach the trough. If you consider the Kondratieff cycle, the deflation has just begun. We, however, expect a reflation meaning resurgence in economic activity in the coming months. But then it will take years for the economy to recover. And it will only recover if the steps taken to help it are appropriate.

What is your opinion about the steps taken so far by the governments across the world to control the crisis?

The steps have not been on the lines of what's exactly required to control the markets. I am of the opinion that governments should not interfere with market forces. The US administration responsible for controlling the crisis is full of bureaucrats. And it comprises people who are responsible for the problem. Ben Bernanke, who is a part of the solution today, was a part of the problem yesterday. There are several others who were earlier a part of the problem and are now a part of the solution. The US is going to the wayside. Even in other countries, the problem with all these stimulus packages has been that they are a pro-government affair.

What about Europe?

Europe is dying. Apart from the crisis, its biggest problem is that its population is fast ageing. Europe will continue to have an intellectual capacity, but the governments there need to ensure that it develops as a manufacturing centre. Otherwise, it will become a holiday destination.

How responsible have investment bankers and professionals been for the crisis we face today?

They are very much responsible for the mess. People have been greedy and have over leveraged for years. This business of unaccounted trade had been going on forever. And that's how things have collapsed so badly.

Remind us Saxo bank's "outrageous" predictions for 2009?

We have predicted that there will be a revolution in Iran in 2009. We have predicted that crude will average at $25. We see the S&P 500 index hitting 500 in 2009 due to falling earnings.

Furthermore, most Asian economies will look towards China to find new trade partners and to scale down their US centric agenda. We have compared China's position in 2009 to US position in 1929. Italy may opt out of the European Exchange Rate Mechanism in 2009.

Past 30 years saw a number of new financial products being introduced. These products thrived as the world economy boomed. What do you think will happen to them in the future?

Products like hedge funds will survive. There are several other products that will come under close scrutiny of the markets. Both lenders and the borrowers will closely scrutinise every step before going ahead with a decision. The prime difference, as I have said earlier, will be in the way a product is handled. You will have specialised people from specialised organisations dealing with specialised products. The crisis has forced everyone to understand how volatile the markets can turn.


PROFILE :Steen Jakobsen CIO, Saxo Bank

Jakobsen has a degree in economics from Copenhagen University and has been in the investment banking industry for the past 25 years. He designs and manages Saxo bank's current trading models and fund management offerings for private and institutional clients. He runs Saxo Bank's Macro fund and the Saxo FX fund, totalling about $140 million (Dh513.8m).

Jakobsen has been an avid footballer and played for his university's team. He was also a part of Denmark's under-17 football team. Reading is Jakobsen's other hobby.