By Bloomberg's Ksenia Galouchko and Michael Msika, authors of "Taking Stock"
While some investors are rejoicing about the positive trade news of the weekend, others are putting out thought-provoking predictions for the year to come.
Imagine: you wake up in 2019 and find out that Germany, abandoned by Angela Merkel, is poised to enter recession. Merkel’s departure from the political stage spurs a power struggle, stealing attention away from Germany’s ailing car industry, which hits the economy.
This is one of Saxo Bank’s “Outrageous Predictions” for 2019, which include President Donald Trump firing Federal Reserve Chairman Jerome Powell and Apple acquiring Tesla.
Saxo Bank describes them as a series of unlikely but underappreciated events which, if they were to occur, could send shock waves across financial markets.
Here we’ll focus on Saxo’s contrarian ideas for Europe next year. The auto industry accounts for 14 percent of Germany’s GDP, and 2018 has been a year to forget for carmakers. BMW is currently trading at 7.2 times estimated earnings for next year, while Daimler and Volkswagen are trading at 6.6 times and 6.2 times respectively.
Fears about future global vehicle demand might explain why. Most investors agree that 2019 is likely to see more Italian political drama. But Saxo Bank takes it a step further in its outrageous predictions: faced with a 300 billion-euro ($341 billion) debt refinancing amid rising interest rates, Italian concerns would hobble European lenders, plunging the entire bloc into recession.
And as contagion spreads, core EU members could approve a debt jubilee for levels over 50 percent of gross domestic product. It’s an ugly picture. But French and Spanish debt-to-GDP ratios have already soared to reach almost 100 percent, while Italy’s is much higher.
A resilient and disciplined German economy is responsible for keeping the euro-zone indebtedness on track so far.
“If some of these outrageous predictions see the light of day, we might finally see a healthy shift toward a less leveraged society, with less focus on short-term gains and growth,” Steen Jakobsen, chief economist at Saxo Bank, said in the report.
“On the negative side, we could see considerable worsening of central bank independence, a credit crunch, and big losses in the asset where everyone is too long: real estate.”
Moving on to the next outrageous prediction from Saxo: Theresa May’s Brexit deal dies in the U.K. Parliament, forcing a snap election, which the Labor Party wins, making Jeremy Corbyn the Prime Minister. The victorious Labor Party then embarks on a “mid-20th century-style socialist scorched-earth campaign to even out the U.K’s gross inequalities,” fueling a surge in inflation and a mass exit of foreign investors.
Finally, the British pound slides more than 20 percent to reach parity with the U.S. dollar. U.K. stocks, which are already down about 8 percent in 2018 and set for the worst year since 2008 amid the political turbulence, are unlikely to celebrate the pound’s drop despite the large share of exporters in the FTSE 100 Index.
Investors may scoff at the prospect of losing sleep over Saxo’s outlandish potential outcomes. Its scenario last year that Bitcoin could tumble to $1,000 in 2018 was too pessimistic, although the cryptocurrency did suffer a massive sell-off. And yet as part of predictions for 2015, it anticipated British voters would eventually opt to leave the EU, a prospect not seen as terribly likely at the time...
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