Economy

Market forecasts rely on an 'increasingly toxic cocktail' of promises, economist says

Key Points
  • Much of the consensus outlook has anticipated a slight pickup in economic growth, and markets worldwide have surged to record highs in recent weeks despite fears of a global economic fallout from the coronavirus outbreak.
  • In his latest research note, Chief Economist Steen Jakobsen said these forecasts relied on assumptions of "low inflation and low rates forever, an abolishment of price discovery, a full acceptance of monopolies in technology and non-commitment to reduce inequality."
A worker inspects an order at a JD.com delivery station in Yizhuang, Beijing, amid the coronavirus outbreak.
Hilary Pan | CNBC

Economic forecasts for 2020 rely on an "increasingly toxic cocktail" of promises which could be derailed by supply chain disruption resulting from the coronavirus outbreak, according to Saxo Bank Chief Economist Steen Jakobsen.

Much of the consensus outlook has anticipated a slight pickup in economic growth, and markets worldwide have surged to record highs in recent weeks despite fears of a global economic fallout from the epidemic, which has claimed the lives of 1,868 people in China with 72,436 cases confirmed.

In the latest Saxo Bank research note, Jakobsen identified that these forecasts relied on assumptions of "low inflation and low rates forever, an abolishment of price discovery, a full acceptance of monopolies in technology and non-commitment to reduce inequality."

He suggested the result was emerging as "permanently low growth, close to zero productivity and a monetary policy with no exit path," as seen in the U.S. Federal Reserve's repo program, the central bank's injection of money into the overnight borrowing market to keep it moving efficiently.

Jakobsen invoked potential parallels to the "stagflation" of the 1970s which "killed growth and the markets" and was driven by "an over-easy Federal Reserve and supply constraints."

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In a separate research note, he highlighted that the market is slow to recognize the risks of a dramatic global growth downgrade as a result of the coronavirus and its impact on supply chains and consumer activity.

In a research note published Monday, Moody's revised down its global growth forecasts by two-tenths of a percentage point, expecting G-20 economies to collectively grow at an annual rate of 2.4% in 2020 with China slipping to 5.2%. Moody's Vice President Madhavi Bokil said anecdotal evidence was already pointing to supply chain disruption, including outside China.

Following Apple's downward revision of its revenue guidance in light of the outbreak, Jakobsen told CNBC's "Squawk Box Europe" on Tuesday that a hit to companies' cash flow will emerge as a prime concern, and that companies will look to establish more localized supply chains with greater independence from Asian operations.

Buying 'puts' on everything

Jakobsen told CNBC that the "TINA" (there is no alternative) approach to risk assets, based on the availability of credit, was not sustainable.

"We've sort of created a business model today through the indexation, the ETFs (exchange-traded funds), the active managers, that they need to be invested (in risk assets)," he said.

"I run a fund which is a capital preservation one, that has an exposure right now of about 34% to equity despite it being a defensive model."

Jakobsen therefore suggested that investors consider "buying puts on everything" and returning to the skeptical positioning seen at the start of 2019.

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"Considering that you have the volatility at a very, very low level, I think you need to protect yourself," he added.

A put is a stock market instrument giving the holder the right to sell an asset at a specified price, by a particular date to a given party. It is therefore interpreted as a pessimistic sentiment about the future value of the underlying stock.

Jakobsen alluded to the early 2000s recessions in Europe and the U.S., in which the boom of the 1990s, accompanied by both low inflation and low unemployment, slowed in some parts of Asia during the 1997 Asian financial crisis.

"All of the crises and any of the sell-offs we have had comes from the credit side. The credit side, yes, is fueled by central banks, but the actual companies' ability to maintain a positive cashflow is under — at least if we are being diplomatic — some constraints from the global disconnect that we first had from the U.S.-China (trade) war and now of course from the coronavirus," he said.