Christopher Dembik
Head of Macroeconomic Research
Summary: A massive MMT-inspired fiscal blast boosts the FTSE 15% better than its continental peers in 2020.
Life has not been a long quiet river for the United Kingdom since the 2016 referendum. At the snap elections of December 12, Prime Minister Boris Johnson wins an overwhelming victory against a divided Labour party over the Brexit issue.
With a popular mandate and strong majority in Parliament, Boris Johnson is in a stronger position than ever to come back to the negotiating table in Brussels. After tough negotiations with its counterparts and especially France’s Macron, the United Kingdom exits the European Union on January 31, 2020, as promised during the campaign. However, everything does not go according to plan. The UK economy starts to show very serious signs of weakness and the risk of a technical recession in 2020 increases sharply as post-Brexit uncertainty remains.
The economy is also penalised by five consecutive quarters of contraction in private investment, a low UK household saving rate, slowing domestic demand and very weak construction and manufacturing sectors. On top of that, there is a growing discontent among the population, particularly among Brexiters, regarding the rise in gross inequalities in the country. In an unprecedented turnaround for the Conservative Party, the government decides to embark on a MMT-based economic policy aimed to restore confidence, stimulate GDP growth and attract investment.
This is the largest fiscal stimulus program in the UK since the end of World War II. It leads to a massive increase in public spending in infrastructure, the health system, education and the implementation of ambitious programmes to support the housing market and provide financial assistance to the most disadvantaged populations. As a result, the public deficit yawns wider to over 6% of GDP.
The Bank of England manages to contain the inflationary effects of this economic policy, and the strong rise in fiscal spending contributes to a jump in consumption and investment which lifts, to everyone’s surprise, post-Brexit Britain’s nominal growth from 3.5% to 8% in 2020. The business community applauds the MMT policy, the FTSE 100 is among the best-performing European indices in 2020, and foreign investors massively come back to the United Kingdom. Brexit is a success.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)