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Ambrose Evans-Pritchard
Ambrose Evans-Pritchard has covered world politics and economics for 25 years, based in Europe, the US, and Latin America. He joined the Telegraph in 1991, serving as Washington correspondent and later Europe correspondent in Brussels. He is now International Business Editor in London. Top Tips for 2010, courtesy of Goldman Sachs
By Ambrose Evans-Pritchard Economics Last updated: December 2nd, 2009
Hot off the press, I have just received the “Top Ten Trades” for 2010 from Jim O’Neill – Manchester United fanatic, eternal optimist, China lover, and head of the markets team at the Goldman Sachs.
Bizarrely, there are only eight of them but let’s not be fussy, and some of these are incomprehensible to all but quant anoraks.
So here are a few.
Long Russian Equities – on the grounds that GDP will recover from its collapse of 9.5pc of GDP this year to growth of 4.5pc next year, along with 60pc earnings growth. Russian stocks have lagged other emerging markets. (For a good reason, one might quibble, since President Medvedev himself says the country has succumbed to “legal nihilism”. Of course, Goldman Sachs was expecting Russia to boom this year – not to go into depression – but lets not quibble about that either).
Long Sterling (against the Kiwi dollar of all things): Actually, that is a great idea – the pound and the kiwi are massively misaligned by historical measures. GS says New Zealand’s central bank will raise rates more slowly than markets think. The Bank of England will tighten more, by 300 basis points by late 2011.
Short Turkish credit because rates will rocket to tackle rising inflation.
Short Spain/Long Ireland: This is interesting. Goldman Sachs says both countries are “boom-bust” property disasters but Ireland “looks better placed to outgrow its debt” and has shown “greater resolve” in taking the axe to spending. Spain’s “behind-the-scenes” bank cleansing is not credible. I agree totally. Goldman Sachs plays this through 5-year credit default stops (CDS). Don’t ask me how to do it. This is hedge fund stuff.
Long Polish zloty (against the Japanese yen). The zloty is “clearly undervalued”. Meanwhile, Jim O’Neill thinks the yen is dogfood. Perhaps, but I am not sure that Goldman Sachs is right in betting on intervention by the Bank of Japan to drive it down – at least not yet. Are the Kabuki artists at the BoJ and the Hatoyama government capable of any action at all, other than hurling abuse at each other?
Touchingly, Goldman Sachs is keeping its faith in Great Britain. The UK economy will be the second-fastest growing economy in the G5 in 2010, at 1.9pc behind the US at 2.1pc. It will be the fastest in 2011 by a long shot at a galloping 3.4pc. Wow. Thank you, Jim.
He may amazingly be right. We devalued 30pc on leaving the Gold Standard 1931 and went on to be the star performer (with Sweden) of the 1930s. That outcome looked pie in the sky to most people in 1931, or 1932, or even early 1933, but it was very clear by 1934. By then the tables had turned entirely. Those with lots of gold who felt so pleased with themselves at the start (ie France), suffered the most – but it took six years.
This is not to say that devaluations are good, but there are certain very rare moments when they can be. This is one of them. The effects of currency shifts may be slow, but they are very powerful.
By the way, did anybody see that Mercedes is relocating a fifth of its C Class plant to Alabama for cost reasons?
LONDON: The world's equity, commodity and exchange markets bounced back in 2009 after a vertiginous plunge, but analysts warn 2010 may be full of danger, with doubts over the rhythm and vigor of the recovery.
"For the financial markets, the past year can be compared to a roller-coaster ride," Rabobank analysts said.
The crisis peaked in March but the ongoing difficulties in the world financial sector and the deeper-than-expected impact of the crisis on the real economy sent equities and exchange markets into a torpor that only recovery plans and major cuts in interest rates could turn around.
Wall Street's key indicator, the Dow Jones, for example, fell for the first time in over 12 years to below 7,000 points at the start of March this year, while the Federal Reserve System launched a US$200 billion (US$1 = RM3.40) consumer aid plan.
Central banks and governments therefore had to try to curb the decline themselves, launching major programmes to buy back banks' unsaleable assets and lowering and sustaining interest rates at historically low levels.
"So far the stimulus medicine appears to be working, because most foreign economies are starting to grow again," analysts from Wells Fargo Securities noted.
The main world economies, such as the US and the eurozone, came out of the recession at the end of the summer.
However, even for economies that are growing again, "recoveries are not yet truly self-sustaining," Wells Fargo analysts warned.
"Unfortunately labour markets generally remain weak, restraining growth in consumer spending."
"In absolute terms, what we are really seeing is a meagre recovery. As yet, it is a recovery that does not have a sustainable growth engine and the economic growth in many countries should stay below what we could reach in a period emerging from a recession," said Rabobank analysts.
David Woo, an economist with Barclays Capital said "the big question in the mind of investors is to know if the bull tendencies of these past 9 months will carry on into next year."
At Wells Fargo analysts said that in 2010 "We project that the major economies of the world will remain in expansion mode, but we believe that the pace of recovery will remain frustratingly slow."
Attention is now shifting to developing countries, as "most Asian economies should achieve solid growth rates in 2010 as momentum from the self-sustaining recoveries that have already taken hold in the region should carry into next year," said Wells Fargo.
Foreign exchange dealers anticipate that the Chinese yuan, currently indexed on the dollar, could be revalued to take account of the good recovery of the Chinese economy and the continuing weakness of the US dollar.
As exchange markets were strongly correlated with stock exchanges, the US dollar has also experienced a jagged year.
It served as a refuge value during periods of concern over the recovery and was attacked each time confidence on the world economic revival increased.
Foreign exchange dealers thus preferred investments that were considered riskier but also more profitable.
The continuing weakness of the dollar has also buoyed petrol prices, which have more than doubled to above US$80. Some analysts predict the cost of a barrel could even go over US$100 in late 2010, with continued weakness of the US dollar and increased demand.
Another beneficiary of the weakness of the dollar and vague attempts by emerging economies to diversify their dollar reserves has been the price of gold, which has broken record after record in 2009, reaching a historic high of US$1,226.56 an ounce at the start of December.
Christopher Barret from Calyon commented that in 2010 "Fundamentals of supply and demand remain weak, and uncertainty regarding the strength of the commodity markets remains high."
If world markets have bounced back globally in 2009, the principal fear of markets and commentators for 2010 lies in the worry of a "W" type recovery, a revival that leads to a second dip before a sustained rebound.
This gloomy scenario has been reinforced at the end of the year by the worries that the failures of states such as Dubai, Greece, Portugal and Spain may have a knock-on effect.
According to an analyst from JP Morgan, "the market could come under significant pressure in the second half from interest rate volatility and negative base effects from stimulus withdrawal."
Caution and low interest rates should remain until the end of 2010 according to optimists. Markets may remain in limbo for another year before the economy gets back on its feet. - AFP
Widely followed strategist Richard Bernstein is making some surprising predictions for 2010. What should you know?
In case you’re not familiar with Bernstein, he was renown for being bearish, but turned bullish over the past few months. On November 10th he went from big bear to baby bull when he told the Fast Money desk, “People like me have underestimated the rebound. The economy is slowly getting better.”
..............
Four of his predictions really struck a chord with the Fast Money traders. They follow:
Corporate profits are likely to explode to the upside during 2010. Trailing four-quarter S&P 500 reported earnings growth could exceed 100%. Investors still seem to be under-estimating the operating and financial leverage that is built into corporate profits.
Employment in the US will probably continue to improve. Consumer Discretionary stocks will likely be among the best performing sectors.
Stock and bond market returns in the US will again be positive.
The US dollar is likely to meaningfully appreciate once market-driven short-term rates begin to rise.
