DEUTSCHE BANK: 13 Outlier Events For 2013

black swan

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Investment strategists have been busy putting together their 2013 outlooks over the past few weeks, detailing their thoughts on how the year ahead will look from a market perspective.A few, like Deutsche Bank’s currency strategy team, have also gone outside the box to consider the types of events that could actually surprise markets next year.

The Deutsche Bank team sums up the point of the exercise succinctly:

When thinking about the year ahead, it is tempting to extrapolate the recent past whether looking at risks or one’s base case. Moreover, there is a tendency not to deviate too far from consensus, perhaps seeing safety in being part of the herd. From a statistical perspective, this is very similar to assuming markets follow a normal or Gaussian distribution. That is, markets are well behaved and extreme outcomes are rare. The financial crisis of 2008 taught us otherwise, yet it is very difficult to shrug off the bias to assume normality in markets.

With this in mind, they offer a list of big “outlier” events that would surprise us.

The Federal Reserve begins buying stocks as an unconventional monetary policy measure

'With the US housing sector apparently turning the corner, stronger equities may be the necessary tonic to further increase household wealth, and also to boost investment...While the Fed does have restrictions on what assets it can buy, it can invoke Section 13(3) of the Federal Reserve Act that allows more extreme actions in 'unusual and exigent circumstances.''

Source: Deutsche Bank

Greece discovers gas reserves worth more than all of the debt it owes

'Greece has sizeable undersea terrain in the Mediterranean, and several Mediterranean countries have already discovered and are exploiting undersea natural resources, most notably the Levantine gas field between Israel and Cyprus. A number of studies that have looked at similar gas finds in the Mediterranean as a basis of comparison put the potential size of gas fields to the South of Crete as high as $600bn.'

Source: Deutsche Bank

Sweden, Turkey, and Brazil bring peace to the Middle East

'Carl Bildt of Sweden, Ahmet Davutoglu of Turkey and Antonio Patriota of Brazil have talked about their interest in helping solve challenges facing the international community based on their common values of dialogue, multilateralism and democracy. In the past, Brazil and Turkey have attempted to resolve the nuclear issues in Iran, while Turkey and Sweden have worked together on issues in the Balkans...their attention could once again turn to the Middle East.'

Source: Deutsche Bank

The British government collapses

'Both the Liberal Democrat and Conservative parties will likely wish to have some time before the next election to distance themselves from the policies of their partners in the eyes of the electorate. This split could potentially occur as early as next year, with divisions over energy policy, parliamentary boundary changes, House of Lords reform and most importantly economic policy leading prominent party members to agitate for a split.'

Source: Deutsche Bank

Central banks around the world adopt negative deposit rates and stocks are up everywhere

'It started in Denmark and Switzerland, with Japan following, and to avoid excessive currency appreciation, EUR and then the US could follow suit with negative rates...With China widely seen as cheap, and EUR periphery risks dissipating, 2013 could be another year where every major equity market is up, aided and abetted by negative rates.'

Source: Deutsche Bank

North Korea opens up politically

Iran takes a softer approach to foreign policy

The correlation between stocks and currencies finally breaks down

'The spike in correlation between G10 FX and equities beginning in 2008 and lasting through the present is unprecedented in the free float era. Next year may finally see the breakdown in this correlation...The elimination of high beta volatility stemming from global macro risks would reduce currency portfolio volatility and potentially improve returns as fundamental and momentum investors get stopped out of trades less often. Finally, reduced equity correlation would likely rekindle interest in FX as an asset class.'

Source: Deutsche Bank

The South China Sea geopolitical hotspot blows up

'An increasingly assertive China, the US foreign policy pivot towards Asia, an ocean bed of potentially vast mineral reserves surrounded by fast-growing resource-hungry nations, disputed maritime boundaries, and fishing boats with tendencies to stray, all make for a combustible situation in the South China Sea. While a full-blown military conflict remains unlikely, a series of naval skirmishes in 2012 and creeping militarization in the region have bred suspicion and heightened tensions.'

Source: Deutsche Bank

Europe gets solar power from the Sahara desert

'In theory, an area of the Saharan desert the size of Wales could harness enough solar energy to power the whole of Europe. The theory may eventually turn into reality thanks to initiatives like Desertec, a consortium set up in 2009 to harness solar energy from the Sahara...Admittedly, there are issues of funding and partners for the overall project, but meaningful advances on the project over 2013 could result in one of the more positive surprises of the year.'

Source: Deutsche Bank

Climate change hits financial markets

'Accelerating climate change has a number of implications for financial markets and FX. For example, if the droughts in the US, Russia and Brazil continue next year as forecast, this could lead to knock-on effects for global food prices, one result of which may be pressure on central banks to tighten policy...Natural disasters such as typhoons and hurricanes can have significant negative impacts on GDP and may weigh on the economic recovery.'

Source: Deutsche Bank

The emerging market bond bubble bursts

'The past few years have seen non-resident investors build up their positions in EM local debt markets to new record levels, driven by a broader global search for yield...Supply shocks, with higher food prices and/or crude triggering higher inflation would be particularly negative...South Africa, Turkey, Russia, Brazil and Peru have the highest pass-through from food and oil prices to CPI and could end up yielding negative real rates in this scenario, which in turn could trigger substantial outflows.'

Source: Deutsche Bank

Malaysia's 40-year-old government gets voted out of power

'In Malaysia, elections must be called within the first half of 2013. Barisah National, the ruling coalition, lost its super-majority (two-thirds) for the first time in Malaysia's modern history in 2008, and there has been a growing popular movement for electoral reform since. An upset by the opposition - although very unlikely by all public indications - could have a significant impact on economic policy...and would likely hurt the equity market with government-linked companies taking a hit.'

Source: Deutsche Bank

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