A chief economist at Danish investment firm Saxo Bank said in a TV interview on Monday that as borrowing levels dominate in both China and Europe and “Trump-mania” is set to fade, global growth is expected to slow down significantly in the coming months.
“Our main global macro outlook still maintains that recession is more likely than not in the near future (12 to 18 months) based on the global credit impulse having peaked simultaneously with global inflation,” Steen Jakobsen, chief economist at Saxo Bank, said.
This risk of recession remains the biggest “perception-versus-reality gap” in the market currently, Jakobsen explained in a recent note. As “the large credit impulse from China and Europe in the early part of 2016 has not reversed to negative”, which it says should make the market conservative, risk averse push investors into U.S. fixed income, the company’s economic model does indicate a significant slowdown even though it is not predicting a recession, he added.
“While the market at large sees less than a 10 percent chance of recession, we at Saxo – together with our friends at South Africa’s Nedbank – see more than a 60 percent chance,” he added in the note.
According to Jakobsen, beating the U.S. in the second and third quarters of this year, Europe is seen as the main region driving global growth. As fears recede on the rise of populism and polls indicate that centrist candidate Emmanuel Macron is likely to do well at the upcoming French elections, a number of investment houses have recently upgraded their outlooks on European stocks and hence Jakobsen is not alone in this thesis.
European stocks “look pretty cheap” compared to U.S. stocks, said Mike Bell, global market strategist at JPMorgan Asset Management. “What you’re starting to see now is that underperformance of earnings that you’ve seen since the financial crisis is disappearing,” he said. He noted that in the euro zone economy, there’s been a fundamental acceleration.
But Europe’s momentum is not followed in other parts of the globe, according to Jakobsen.
“One thing is absolutely clear: Asia is not going to contribute anything in 2017 to growth. China is on total standstill,” Jakobsen said.
“They don’t know what to do with (President Donald) Trump and I think Trump again showed his hand over the weekend that he is not to be relied on in terms of a set-out path for how they conducted themselves,” he added.
In order to reduce the Chinese trade surplus with the U.S. They also agreed to increase cooperation to curb North Korea’s nuclear program, Trump and the Chinese President Xi Jinping agreed during a summit last week to develop trade talks during the next 100 days.
As a show of force amid rising fears that North Korea will launch an international ballistic missile test in the coming days, Trump sent 100,000-ton USS Carl Vinson and U.S. Navy support ships to the Pacific shortly after the meeting. after an alleged chemical attack, Trump approved a missile strike on Syria last week. Such a decision overshadowed the summit with his Chinese counterpart.
“A dominant part of the equity analysts sees a significantly higher S&P but it’s based on hope. Hope to me belongs in church on a Sunday,” Jakobsen said.
(Adapted from CNBC)