Saxo Bank Quarterly Outlook

Geneva/Zurich - Consumer deleveraging will continue and demand will stay subdued, predicts Saxo Bank, the trading and investment specialist, in its fourth quarterly financial outlook for 2009.

Saxo Bank predicts that monetary stimuli and government deficits are likely to continue, fostering a "Japanization" of financial markets, whereby we will see higher price-to-earnings ratios and lower yields on both corporate bonds and treasuries.

Saxo Bank's Chief Economist, David Karsbøl comments: “Because Western economies are more flexible and able to embrace the necessary changes, we do not think that things will get as bad as was the case in Japan. However, it is increasingly evident that the current scenario in the West bears a close resemblance to post-1990 Japan, and it looks progressively like we have entered a new regime in which everyone assumes that large companies will be bailed out. This means that default risk is 'priced out', and we see higher price-to-earnings ratios and lower yields on fixed income.”

In its fourth quarter outlook released today, the Copenhagen-based investment specialist predicts that the American economy will return to positive GDP growth in the second half of the year, but warns that the sustainability of this growth is questionable and will be largely due to government spending and inventory restocking. US Unemployment will continue to rise over the coming months, and that this will further hinder debt repayments and consumption.

David Karsbol believes a USD short seems to be a vote for the global recovery and has become the "newer and better" carry trade. “The very low US's yields and need for external financing and increasing reluctance from China to buy greenbacks is a toxic cocktail that could drive the currency even weaker in the near term," Karsbol says.

Looking towards the end of the year, market dynamics indicate a shift from this year's equity market rally. Global equity markets rallied 59% from the March lows through to August, and looking ahead, dynamics indicate a shift in performance towards micro trends and sector-specific growth and valuation stories.

Karsbol adds: “Most indicators of economic activity are stabilising, but at very depressed levels. We believe investors should continue to take cyclical risk through regional allocations, with particular emphasis on emerging markets over Europe and the US, where it will be difficult to maintain and improve growth."