Saxo’s Outrageous Predictions give festive food for thought for the shipping sector
In the sea of 2020 predictions, Saxo Bank’s Outrageous Predictions sail their own very unique course. For nearly 20 years the Danish investment bank has had its experts take a hard look at the coming year to “create the very conversation which is difficult because today’s world has become too partisan and intolerant”, according to the bank’s chief investment officer, Steen Jakobsen.
For 2020, the overriding theme from its experts is disruption. “The year could represent one big pendulum swing to opposites in politics, monetary and fiscal policy and, not least, the environment,” says Mr Jakobsen.
Saxo describes the current paradigm as “simply at the end of the road”, because extending the last decade’s trend into the future would mean “a society at war with itself, markets replaced by government only, monopolies as the only business model and an utterly partisan and atomised public forum for news and information — where lies, deceit and spin mean there is no ability to agree on basic truths and best practices”.
Of its ten outrageous predictions for 2020, three stand out for their relevance to world trade, commodities and shipping. Head of equity strategy, Peter Garnry opens his prediction with the bold assertion that in energy, green is not the new black.
He notes that the traditional fossil fuel industry peaked in 2014 and has since been transformed by two “powerful forces”. The first was the combination of the rapid arrival of US shale gas, globalised LNG supply chains and the advent of US shale oil, which saw the US become the world’s largest oil and petroleum liquids producer.
The second has been the climate change movement and a concomitant surge in demand for renewable energy. These factors have led to lower equity valuations for ‘black energy’ companies, putting them at a 23% discount to clean energy companies.
“In 2020, we see the tables turning for the investment outlook as OPEC extends production cuts, unprofitable US shale outfits slow output growth and demand rises from Asia once again,” predicts Mr Garnry. The surprising winner of this will be the oil and gas industry, while the clean energy industry will suffer a “wake-up call”.
America First Tax
John Hardy’s outrageous prediction lands a punch on President Trump and his trade policies. Serving as the head of FX strategy at Saxo, Mr Hardy forecasts the enforcement of an ‘America First Tax’ to reduce the US’ trade deficit.
While 2020 might start with reasonable stability on the trade policy front – China and the Trump administration have already reached a temporary agreement on tariffs – this is unlikely to last long in Mr Hardy’s eyes. He sees the US economy struggling for air early in 2020 as US trade deficits with China stagnate and Chinese purchases of agricultural products are maxed out.
“Eyeing polls showing a resounding defeat in the 2020 US Presidential election, Trump quickly grows restive and his administration drums up a new approach in a last-ditch effort to steal back the protectionist narrative: the America First Tax,” foresees Mr Hardy.
The fictious tax sees a complete reconstruction of the US corporate tax schedule to favour US-based production under the claimed principles of ‘fair and free trade’. All existing tariffs will be cancelled to be replaced by a flat value-added tax of 25% on all gross revenues in the US market that are sourced from foreign production.
“This brings stinging protests from trading partners for what is really just old tariffs in new clothes, but the administration counters that foreign companies are welcome to shift their production to the US to avoid the tax,” says Mr Hardy. “Furthermore, the administration claims that the ‘fair and free’ portion of the new America First Tax is that the 20% rate is indexed to the size of the US trade deficit as a % of GDP and would fall to 5% in the event the US moves into a trade surplus.” An immediate consequence of the new tax would be a sudden scramble to re-site production to the US – and a direct hit on global trade with the US.
Demise of the dollar
Singapore-based Kay Van-Petersen, Saxo’s global macro strategist, used his prediction to focus on Asia’s desire to shift away from US dollar dependence. He foresees the launch of a new reserve currency in Asia in the form of an AIIB-backed digital reserve currency that takes the US dollar index down by 20%.
He explains that the US dollar’s rank as the world’s chief reserve currency has long been a double-edged sword, both for the US, and for the rising star of China. It’s now outliving its usefulness as a reserve currency for the region.
“To confront a deepening trade rivalry and vulnerabilities from rising US threats to weaponise the US dollar and its control of global finances, the Asian Infrastructure Investment Bank creates a new reserve asset called the Asian Drawing Right, or ADR, with 1 ADR equivalent to 2 US dollars, making the ADR the world’s largest currency unit,” Mr Van-Petersen predicts.
The new currency will be powered by blockchain technology, with regional central bank reserves injected with the reserve currency. It wouldn’t be a publicly tradable currency, but instead represents a basket of currencies and gold, with the Chinese renminbi heavily prominent in the mix and the US dollar weighted at below 20%.
“The move is clearly aimed at de-dollarising regional trade,” says Mr Van-Petersen. The upshot of the arrival of the new currency is that local economies multilaterally agree to begin conducting all trade in the region in ADRs only, with major oil exporters Russia and the OPEC nations happy to sign up due to their growing reliance on the Asian market. “Export revenues received in ADR can be converted back into local currencies by central banks and a deepening market of ADR-based bonds and other financial instruments, also secured on the blockchain, deepens the liquidity and trust in ADRs as a reliable asset,” he adds.
This scenario has a grave impact on the US dollar, which weakens by 20% against the ADR within months in 2020, and hits the dollar-dominated shipping industry hard.