Macro-Economic Briefing: The impact of global politics, US sanctions policy, market crises and trade wars on MENA economies

By Christopher Dembik,

Head of Macroeconomic Analysis at SAXO BANK

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Macro-Economic Briefing: The impact of global politics, US sanctions policy, market crises and trade wars

• 2019 Views: Weak economy and fragile financial systemSaxo Bank’s Q1 theme was « Global policy panic », which has been proved right. Central banks had to adjust to lower growth than expected. The Fed is becoming more « market dependent », leading to a neutral stance, the ECB is discussing new TLTRO and the PBOC is implementing new stimulus. China and Europe are slowing much faster than most people think. Europe’s economy is the weakest since 2012 and Germany might become soon the EU’s biggest worry. China is relaunching core credit (while deleveragingin the shadow banking continues), but the macroeconomic effects will only be noticeable in the course of S2 2019. In the MENA region, the year 2019 will be all about lower USD liquidity and low oil prices.

• Mapping geopolitical, financial and environmental risksLast-minute US-China trade agreement after a new Trump-Xi meeting, European political risk is the new normal, a no-deal Brexit is unpriceable

• Investing in a period of economic uncertaintyA lot of bad news has already been priced in by the decline in the market valuation. The US market’s PE ratio has fallen to 15.4 times – a healthier level. Earnings growth will be back down in single digits in the coming period. The main question mark going forward is very much linked to the Fed’s monetary policy.

Factors affecting growth in 2019Low commodity prices - POSITIVE

Factors affecting growth in 2019Low interest rates - POSITIVE

Factors affecting growth in 2019Deglobalization/Lower global trade - NEGATIVE

Factors affecting growth in 2019Low money supply intensity - NEGATIVE

Factors affecting growth in 2019Low USD liquidity – VERY NEGATIVE

Fragile Macro DynamicsGrowth euphoria is over

Fragile Macro DynamicsChina is at the epicentre

Fragile Macro DynamicsThe UK’s main risk is not Brexit but the lack of credit growth

Fragile Macro DynamicsCompanies most exposed to the UK are getting crushed

Fragile Macro DynamicsVery negative on Germany

Fragile Macro DynamicsThe key factor affecting German growth is…China’s slowdown !

Fragile Macro DynamicsRecession Risk Watch (1/3)

Fragile Macro DynamicsRecession Risk Watch (2/3)

Fragile Macro DynamicsRecession Risk Watch (3/3)

Fragile GeopoliticsPolitical polarization, global disintegration and frontier technology Cold War

Fragile Financial MarketsQT has revived volatility

Fragile Financial MarketsAsset bubbles are deflating

Fragile Financial MarketsA “dovish” FED is not necessarily a good sign

Fragile Financial MarketsOur FX Risk Indicator points to higher risk appetite

Fragile Financial MarketsRegional Stock Market Divergence

Fragile WeatherEconomic costs are RISING fast

Which investment strategies have performed well during economic downturns ?Consumer staples stocks have held up best out of any sector

Which investment strategies have performed well during economic downturns ?Gold beats the S&P 500

Which investment strategies have performed well during economic downturns ?The USD serves as a recessionary hedge & an hedge against protectionism

Conclusions: Navigating in uncertainty

• Central macroeconomic scenario for S1 2019Central banks are shifting out of normalisation mode but are not ready to reverse monetary policy yet. Except for the PBOC that may offers new facilities, the G4 central banks are expected to remain in pause mode, which means that G4 global liquidity will continue to slowdown. Meanwhile, recession risk isincreasing, but the lag between the yield curve inversion – the market’s favorite leading indicator - and the recession is typically 22 months.

• Market view for S1 2019Risk appetite is alive and well in markets, but there are clear signs that many investors remains cautious. One of the best signs is that gold is becoming a strategically important asset again. According to the Gold Council, more than 20 countries all around the world bought gold since the start of 2017. In addition, there are less drivers to lift the market than in previous years and especially in the first part of 2018. If the FED stops QT (which is not our central scenario for S1), it could provide a welcome boost to equities and lead to tighter spreads and lower volatility.

• Even more so now, every investor should have three portfolios:1) Safe portfolio (capital preservation)

2) Trading portfolio (growth)

3) Speculation portfolio (hunches)