Saxo Q3 Outlook: Covid-19 amplifies the unravelling of globalisation

Saxo Markets, a leading FinTech specialist that connects people to investment opportunities in global capital markets, has published its Q3 2020 Quarterly Outlook for global markets.

In its Q3 2020 Quarterly Outlook for global markets, Saxo’s global team of strategists share their perspectives and trading ideas on equities, FX, currencies, commodities, and bonds, as well as a range of central macro themes impacting client portfolios. 

An excerpt from Steen Jakobsen, Chief Economist and CIO at Saxo who touches on localisation & state capitalism as a theme:

“Potential higher marginal costs for producing locally will prove less important than the political imperative to prove robust self-sufficiency. In short, prices will rise for nearly everything – and in real terms, not just through price inflation.

This will be extremely expensive: for the consumer, for governments and for jobs. But what could prove far worse than the implications of deglobalisation is the unfortunate reality that Covid-19 has accelerated the death of free markets as the driver of economies.

The combination of localisation, ‘my-nation-first’ and state capitalism brings massive headwinds for growth, employment, the social fabric and the markets. These approaches to tackling the Covid-19 crisis are a one-way street into a narrowminded, provincial, nostalgic narrative that states can go it alone. But fighting both the pandemic and future similar risks needs a more global approach, not a local one.”

Key insights from Saxo’s team of global strategists:

Localisation, Trump & Covid-19: the best things to ever happen to China – Kay Van-Petersen, Global Macro Strategist:

“China is facing the perfect storm of adversity and challenges. Adversity, though, will only make a country more resilient and innovative, forcing it to tap into its true potential.

Trump and Covid-19 are going to be the best things that have happened to China – a function of which will spill net positive to the rest of the world – in that it will accelerate Beijing’s plans to go from being export dependent to domestic-consumer driven. It will take China’s 2025-2035 plans, which are all about technology, moving up the value chain and developing tech infrastructure, and bring them forward.

Overall, localisation will raise global competition. Globalisation lowers global competition: why innovate when you can just find a lower-cost producer?

There will be a huge opportunity cost for the countries that choose to ignore dealing with 1.4 billion consumers and an economy that will become the largest in the world in most people’s lifetime. This opportunity cost will be an opportunity boon to others – such as Germany and the eurozone as a whole – who will capitalise by pivoting further towards China.”

More pain ahead for equities as the world resets - Peter Garnry, Head of Equity Strategy:

“As we enter Q3, markets remain fragile. The VIX is indicating a very volatile summer, where Q2 earnings releases will finally reveal the real damage to the corporate sector and potentially give us a rough sketch of what’s ahead.

Valuations have bounced back to levels where the risk-reward ratio is not attractive in a historical context. History suggests that there is a 33% probability, at current valuation levels, that the international equity investor will experience negative real rate return over the next ten years.

Investment themes in a world getting more localised. One theme that makes sense in this transition is investing in small caps with a domestic revenue profile in non-cyclical parts of the economy (healthcare, consumer staples and utilities).

The transition to a more localised global economy will create an uncertain path for many companies and therefore the good old strategy of investing in high-quality companies with low financial leverage is also attractive in our view.

The green transformation sector of the economy will continue to do well because the current economic model is a net drag on the environment. Other industries such as healthcare, robotics and 3D printing will also get a boost from policies of self-reliance and domestic-oriented production in the developed world.

Companies with a strong digital presence and business model will also naturally do very well, however with extreme valuations among some online companies, investors should be cautious on what we call “bubble stocks”.

Gold will likely do quite well in this future landscape of state capitalism and localisation, but beware the myth of buying gold miners - they are not doing better than spot gold, despite their balance sheet leverage, so investors wanting gold exposure should be wary.”

Gold bulls risk delayed gratification in Q3 – Ole Hansen, Head of Commodity Strategy for Saxo:

“Gold remains the only key commodity to show a positive return so far in 2020. Following April’s rollercoaster ride it has settled into a range around $1700/oz. Gold’s ability to frustrate, then eventually reward, the patient investor is likely to be on full display during the third quarter. Multiple positive tailwinds are currently being offset by what we believe will be a short-lived decline in inflation.

“We maintain our bullish outlook for silver, and for gold now that its premium to silver has narrowed. There are several reasons to believe that gold will make a move to at least $1800/oz in 2020, followed by a fresh record high in the coming years.

“Silver’s record cheapness to gold helped drive a strong recovery in late Q2. Our bullish outlook for gold will take silver higher. But given its often-volatile behaviour, and the current growth outlook, we think silver may struggle to recover more ground versus gold. The gold-silver ratio, a key measure of relative strength, may in a best possible scenario reach 95 ounces of silver to one ounce of gold. A major second wave of the pandemic, however, may see it weaken back towards 110 – reflecting a 10% underperformance from current levels.

“The outlook for crude oil demand remains challenged by the not-yet-under-control Covid-19 pandemic. While OPEC+ have made a gigantic effort to support the global market through record production cuts and high compliance, the potential for crude oil to reclaim further ground will be limited during the second half of 2020.

To access Saxo Bank’s full Q3 2020 outlook, with more in-depth pieces from our analysts and strategists, please go to: https://www.home.saxo/insights/news-and-research/thought-leadership/quarterly-outlook