COMMENT: Surprises in the Year of the Rabbit

By bne IntelliNews January 17, 2011

Plamen Monovski of Renaissance Asset Managers -

"Those who are easily shocked should be shocked more often."

Mae West

Expect the unexpected: below are the 10 surprises we expect to arrive in 2011. Some have a non-trivial possibility of happening, but we have deliberately mixed the outright ridiculous with the probable, leaving the reader to decide which is which.

1. Propelled by resurgent consumer spending, the US economy will be the fastest growing economy in the developed world and attract the most capital worldwide. US house prices to soar as global investors are pulled in by cheap prices. Inflation arrives in spades and the Federal Reserve jacks up interest rates in response.

2. Following the Fed's rate hike, prices of US fixed-income assets fall further. This causes a panic and an exodus from long-dated bonds. Equity markets fall in tandem. The collapse in bonds causes a major financial institution to fail, but this time there is no bailout. Equities tank, but then stage an almighty rally as the damage caused by the bank-bust is surprisingly limited. The US equity market ends the year as one of the world's best markets.

3. The appetite for risk increases further, making asset prices in peripheral Europe (the riskiest trade available) soar. The bonds and equities of the PIIGS become the best performing developed markets in the world. The prices of European financials that are heavily exposed to these assets soar to dizzying highs. The entire developed world revives and talking heads start to chatter about a "new era of productivity." Inflows into traditional developed world equities dwarf those of the dot-com boom as vast sums of money are reallocated from bond and money market funds.

4. Emerging market assets underperform, outshone by higher US bond yields and cheap developed world asset prices. Money flows out of most of the BRICs, but India is harder hit than the others: the boom-time excesses are laid bare and India is transformed from a darling of the markets to the dog. The talk about an endless boom-bust cycle for emerging markets is rife, aided by rising risks in China.

5. Increasingly aggressive, China starts to flex its military muscle and wages a short, but devastating, war against one of its neighbours. The falling price of US Treasuries lacerates the PRC's balance sheet, which constrains its ability to finance social spending. Resentment begins to build. The transition from export- to consumption-driven growth proves more traumatic than anticipated as millions of workers lose their jobs. With no social net to support them, they rebel and the Communist Party is ousted. Xi Jinping takes over the presidency and steers the country back towards communism. Subsidies for all lead to higher consumption, including that of cars and durables. The oil price soars to $150 a barrel as strong US and Chinese demand strains supplies.

6. Russia booms as oil prices soar. Rapid reform from the Kremlin and a dramatic improvement in the investment environment results in frenetic inbound investment. The Russian stock market is the best of all the markets in the world - despite continued lower price/earnings valuations versus the other emerging markets - and Russia becomes a global M&A hothouse. All the multinationals belatedly decide they must have a Russia strategy and rush to cater to the largest middle class in the emerging market world. Vladimir Putin decides not to run as a president in the 2012 elections and says his job is finished. President Dmitry Medvedev announces the break-up of Gazprom and a wide-reaching renewable energy strategy.

7. The European Union, impressed with Russian reforms, opens membership negotiations with Russia in order to stabilise the bloc and replace members that are no longer desirable. Russia's renewable energy ambitions boost European alternative energy stocks, which are transformed from dogs to star performers in 2011. Utilities join the party, boosted by their renewable businesses. At the same time, autos and luxury goods exposed to emerging markets correct sharply. A few global luxury brands go bankrupt due to their too-rapid expansion in emerging markets.

8. One of these brands is a venerable Swiss name. But its demise is the least of Switzerland's problems. As public finances in the high-tax countries of Europe recover, they sharply cut tax rates in order to stimulate business. This leads to a mass exodus from Switzerland where the outcry against foreign immigrants reaches an all-time high, only to be matched by sky-high real estate prices and falling standards of living. Switzerland's problems are compounded by the fact that some PIIGS, recently departed from the EU, re-brand themselves as tax havens. The Balearic Islands become the new mega-rich playground and property prices soar.

9. While some emerging markets struggle to attract fans, others are fast to embrace supply-side economics. Taxes are cut to the bone and their economies are thrown open to business. Nigeria leads the pack, riding high on the $150/barrel oil price. Africa finally gets noticed and the lion's shares of global companies announce an African expansion by the end of the year. Africa is singled out as the hub for low-cost manufacturing globally.

10. As the author of these predictions, Renaissance Asset Managers wins global fame for their accuracy. The publicity noise is so distracting to the money managers that they sever all relations with the media. RAM adopts a company policy of never trying to forecast the future for fear of getting it right.

Plamen Monovski is CIO of Renaissance Asset Managers

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