It is always refreshing - if at times unnerving - to see a wealth management firm make "outrageous" forecasts but Saxo Bank has no such inhibitions. And who knows? Some of these predictions might turn out to be on the money.

A fixture event for the start of every new year is Denmark’s Saxo Bank issuing a raft of “outrageous predictions” for the upcoming 12 months – and in a few cases those views aren’t quite as off-the-wall as might be expected, even if they go against much mainstream thinking. It is rather refreshing in fact, in these days of consensual forecasts, perhaps, to see a firm willing to make some bold guesses for the future. 

So, as 2015 winds down to a close, here are some of those “outrageous predictions”:

The euro/dollar exchange rate will rally to 1.23
Chief investment officer Steen Jakobsen argues that in four of the last five US Federal Reserve rate-raising cycles, the dollar has peaked around the time of the first hike in rates, suggesting that the direction of the dollar is inversely correlated to the Fed hike cycle. “A higher euro/dollar will not only make the European Central Bank lose face but also catch the consensus out as most investors and traders believe parity between the euro and dollar is only a matter of time,” he said.

He goes on to to argue that, in macro terms, the direction of the dollar is likely to be the most powerful factor explaining net returns on asset classes. “The irony here is that if the dollar does not weaken, then the world most likely will be in deep recession as a stronger dollar increases the debt burden for US-dollar funded and dependent emerging markets, lowers profit for bigger US companies, lowers commodity prices through the link of being traded in the dollar and lowers the overall emerging market growth which is more than 50 per cent of world growth today,” he said.

Russia’s rouble rises 20 per cent by the end of 2016
This prediction comes from John Hardy, head of foreign exchange strategy. He argues that in 2016, oil prices will rise as demand growth in the US and China outstrip overly pessimistic estimates, just as US oil production is slowing and even reversing because of a financial “debacle” linked to shale oil companies. This development would be a boost to Russia’s energy-dependent economy. Under Hardy's predictions, the US Fed allows the US economy to “run a little bit hot”, with the stronger dollar forex rate pricing in an inappropriately slow pace – this is positive for emerging markets and their currencies, and benefits Russia and the rouble. Some of the diplomatic isolation of Russia also fades in 2016; there are international flows back into the Russian economy. The rouble will rise by around 20 per cent against the dollar/euro basket in 2016.

Silicon Valley’s “unicorns” are brought “back to earth”
This is the prediction for 2016 from Peter Garnry, head of equity strategy. Garnry notes that there has been a bubble in unlisted tech firms in the US and that “2016 will smell a little like 2000 in Silicon Valley with more start-ups delaying monetisation and tangible business models in exchange for adding users and trying to achieve critical mass”. He gives the example of Fidelity’s recent write-down of its Snapchat stake by 25 per cent, as an event highlighting the uncertainties around valuations of venture capital-backed technology firms. Garnry argues that as the US rate rise cycle becomes priced in among all asset classes in 2016, yields on alternatives to VC-backed start-ups will rise and make for a nervous time for VC investors hoping for IPO exits.

Olympics to “turbo-charge emerging markets" Brazil-led recovery
According to Mads Koefoed, head of macro strategy at Saxo, a period of emerging market stabilisation, investment spending on the Brazil Olympic Games and some modest reforms will cheer up investors around Brazil and cheaper local currencies should boost emerging market exports. Koefoed notes that the MSCI EM index of emerging market equities trades at a cheap forward price-earnings multiple of 12.1 versus 18.8 for developed market indices, a discount Koefoed said is “unreasonable”. He predicts emerging market indices will climb 25 per cent in 2016.

"Banner year" for the Democrats
Saxo’s Hardy predicts 2016 will be a banner year for the Democrats in the race for the White House and in control of Congress. “In 2016, the Republican primaries descend into chaos after the party’s voters manage to nominate another weak, centrist candidate after the long-self destructive process of the nomination process. Donald Trump goes down in flames, taking the Republican Party with him and leaving its voters demoralised with their weak options in the presidential and congressional elections,” he said. He argues that younger, more diverse, more liberal and “overeducated and unemployed Millenials” vote Democratic. A result is that risky assets and the dollar are initially hit, but sentiment dramatically changes because a “rare” political majority pushes through fiscal stimulus that is positive for economic growth.
 

Crude oil price could "shoot up"
Ole Hansen, head of commodity strategy, in a prediction that certainly is bold, reckons that crude oil prices could shoot up to $100 per barrel this year before later shifting to a $50-$70 range.

Under this scenario, as oil prices stay low earlier in the year, evidence of slowing production in the non-OPEC oil states is the trigger for OPEC to cut output and break a downward price move, encouraging investors to scramble back into the market. The re-introduction of a geopolitical risk premium and lower supply caused by scrapping of some production projects encourages prices to surge. Prices will later come off, but with the ever-present risk of short-term spikes.

Silver rallies 33 per cent
In another view from Hansen, he argues that silver, which is often mined as a by-product of extraction of other metals, will see the impact of a broad-based cut in output following weaker prices of recent times. Stronger economic demand from China, Europe and the US will be positive. Silver also benefits from its being used in solar cells, and greater demand for renewable energy will also help the metal. 

“Meltdown” in global corporate bonds
So argues Simon Faisal, head of fixed income trading at Saxo. He expects that growing evidence of overheating markets in 2016, affecting labour, housing, equities and bonds, will propel the Fed into a series of rate hikes. While expected for years, this will hurt corporate bonds. One structural issue, he said, is that many of the bank and broker balance sheets that were, pre-2008, allotted to market making and bond broking have disappeared, so selling pressure on bonds will have a dramatic effect. “There’s no airbag to shield the market as purchasing power from banks, opposing market interests and trader quotes is absent. The result is devastating: bond markets simply collapse, as trading is halted in some of the major markets, leaving them frozen solid for weeks as we approach the winter of 2016.”

El Niño Sparks inflation surge
In a view from Garnry, in which he reflects on the volatile weather seen in 2015, he said 2016 could be one of the hottest years on record, with more droughts on one hand, and more floods and extreme conditions elsewhere. He says the El Niño system will be the “strongest on record” and cause droughts in parts of Southeast Asia and Australia, hitting agriculture output. The Bloomberg Agriculture Spot Index will rise 40 per cent, adding to inflation pressure.

Inequality has last laugh on luxury
This is the argument of Christopher Dembik, economist at Saxo. He predicts that “conspicuous consumption” on luxury goods by the wealthy “elite” has come at the expense of spending on education, poverty reduction and infrastructure. He claims that luxury spending is a “net economic loss”. He predicts that in Europe, and some other regions, there is a move by states, such as in France, to create a guaranteed minimum income and to cap highest wages to combat inequality. As a result, production increasingly favours high-tech and mass consumption rather than luxury, a development that hits luxury firms hard. Sales of LVMH, the world leader in luxury, sink by more than half under this scenario, he says.