Saxo Q1 Outlook: Going green is fuelling the energy crisis; China keeping its inflation rate low could relieve market worries

HONG KONG, 25 Jan 2022 – Saxo Markets, the online trading and investment specialist, has today published its Q1 2022 Outlook for global markets, including trading ideas covering equities, FX, currencies, commodities and bonds, as well as a range of central macro themes impacting investors and markets.

“Since late 2020, we have held the view that the real economy is far too small for the financial and economic agendas of governments, central banks and the green transformation.”, says Steen Jakobsen, Chief Economist and CIO at Saxo Bank, in the introduction to the Quarterly Outlook.

“The critical chokepoint for real economic growth from here is the de facto energy crisis we are experiencing—one that will only continue due to decades of underinvestment in the space and the continued lack of financing for the fossil fuel energy that still drives the bulk of energy inputs into our economy.”

Going green is fuelling the energy crisis

“In short, the policy priority—going green—is fuelling the energy crisis. The more we operate without a tangible plan for securing a smooth path to the hoped-for future of green energy, the more our economies will be disrupted in chaotic fashion due to inadequate baseload when famously inelastic energy demand exceeds generation capacity. 

The policy response so far has been to propose an even deeper commitment to green energy and to ignore the required improvement in grids, transmission, and better use of conventional energy. The worst oversight by policymakers is the inability to admit the reality that alternative energy alone cannot power the future at current living standards. What the world needs is to find and develop new higher-density, low-carbon energy sources, most likely based on nuclear fission and fusion.” Steen says.

China keeping its inflation rate low could relieve market worries

“Energy tightness has brought global inflation, bringing central banks, including Fed, to reduce asset purchasing programs and increase interest rates. Unlike the rest of the world, China kept its inflation rate low because of its relatively tight monetary policy, slowing economy, and strong CNY. It left room for the Chinese government to ease its monetary policy starting from December 2020 and to ease its monetary policy by reducing its interest rate at the beginning of 2021. This might relieve market worries about the slowing economy in China.” says Edison Pun, Senior Market Analyst at Saxo Markets.

Property market of China remains the center of concern but is already priced in

Edison continues, "However, the property market is still the center of concern, and house prices are set to decline. Declining housing prices could hurt China’s domestic consumption as we are seeing poor retail sales data in recent months. More and more tightening policies on Chinese big tech companies are breaking the growth, which would continue hurting the profit growth for Chinese tech companies. However, the value of Chinese tech stocks has already reflected the policy discount and started to attract investors.”

Equities: The energy crisis could turn energy stocks into a secular winner

“Last year a global energy crisis emerged slowly before exploding in the hands of Asia and Europe in the late part of the year, with European natural gas futures soaring 2,381 percent since May 2020. Higher energy prices—the main theme of this quarterly outlook—are a tax on consumers and businesses. They can push up consumer prices and shrink margins through higher direct operating expenses and secondary inflationary pressures hitting industries differently. They can also push interest rates higher, directly lifting the discount rate on future free cash flows and thus lowering equity valuations. 

There are many reasons to believe energy prices will remain elevated for the foreseeable future due to underinvestment, ESG and the green transformation. This will entice investors to get exposure to the overall energy sector to balance their portfolio against an overweight in technology and growth stocks”, says  Peter Garnry, Head of Equity Strategy at Saxo Bank. . 

Starvation of investments in the physical world  - “There are many reasons behind the current energy crisis—some short-term and others long-term. Some of the most obvious are China’s U-turn on coal power, Germany’s abandonment of nuclear power, Russia’s geopolitical play, a global natural gas market through LNG, underinvestment in the supply of oil and gas, and extraordinary weather patterns reducing electricity production from hydro and wind turbines.”

Commodities supported by greenflation and tight supply

“We see another year where tight supply and inflationary pressures will support commodity returns. The decarbonisation of the world will increasingly create so-called greenflation, where rising demand and prices of commodities needed to support the process will be met by inelastic supply—partly driven by regulations such as ESG—prohibiting some investors and banks from supporting mining and drilling activities”, says Ole S. Hansen, Head of Commodity Strategy at Saxo Bank. 

Energy “While gas is being viewed as the bridge between coal and renewables in Europe, Asia remains stuck with coal as a key source of energy, not least in China and India where surging power demand last year was met by increased demand for coal. As a result of this and despite the need to decarbonise the world, the amount of electricity generated worldwide from coal surged by an estimated 9 percent to a new record high in 2021. The International Energy Agency estimates that demand will reach a fresh record this year, at a level where it may stay over the following two years.”

Industrial metals rose strongly in 2021, but with most of the 32 percent jump in the London Metal Exchange Index occurring during the first half, the year ended with some degree of uncertainty. While the energy transformation towards a less carbon-intensive future is expected to generate strong and rising demand for many key metals, the outlook for China is currently the major unknown, especially for copper where a sizeable portion of Chinese demand relates to the property sector. But considering a weak pipeline of new mining supply we believe the current macro headwinds from China’s property slowdown will begin to moderate through the early part of 2022.

Precious metals was the only sector suffering declines last year, but considering the headwinds from rising bond yields and a stronger dollar, gold’s negative performance of around 3.6 percent was acceptable from a diversified portfolio perspective. Being the most dollar- and interest rate-sensitive of all commodities, gold will take some—but not all—of its directional inspiration from these two markets. 

Foreign exchange: Mean reversion for the big 2021 moves and lots of volatility

USD and CNY(CNH): The fiscal cliff and a Fed that will hike until things break while China set to ease. “Entering 2022, it seems that every appearance from the Fed is more hawkish than the last. Meanwhile China has signalled the opposite: that it will bring easing and support for a Chinese economy heavily impacted by official moves against excesses in its enormous real estate sector along with a crackdown on tech companies, both of which have dented markets there as well as the real economy. The overlay of a “zero tolerance” policy on Covid has seen additional limits on economic activity.” says  John J. Hardy, Head of FX Strategy at Saxo Bank. 

To access Saxo Bank’s full Q1 2022 Outlook, with more in-depth pieces from our analysts and strategists, please go to: https://www.home.saxo/en-hk/insights/news-and-research/thought-leadership/quarterly-outlook