Deutsche Bank: Beware Sovereign Defaults And The End Of The Dollar Carry Trade In 2010

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Deutsche Bank is out with an outlook for 2010, which includes various themes and risks investors need to watch out for.

The basic idea, laid out by strategists Jim Reid, Mahesh Bhimalingem, and others is that things look good in the beginning of the year, but that trouble spots loom on the horizon.

One in particular they highlight is the possibility of a sovereign default, an issue that’s come to the foreground since Dubai.

They write:

Although we’re positive in the near-term, looking at the world today it’s clear that
the current macro environment will be difficult to sustain. The markets will need
evidence in 2010 that there is an observable path back to fiscal discipline for those
countries that have been most aggressive in responding to the fall-out from this
crisis. If not we continue to run the risk of Sovereign land mines disturbing the
benign corporate landscape. 

Indeed if 2010 is a difficult year it’s highly unlikely that the catalyst comes from
within the equity or corporate credit markets. This means the macro environment
will decide 2010, and in reality investors in Sovereign debt around the world will
probably decide the fate of risk assets. In late 08/09 the authorities had little to
lose in aggressively attempting to stave off a Depressionary cycle. So far they
deserve extremely high marks. However 2010 could be a transitional year
between heavy intervention and the paying of the bills. A return to positive global
growth should help but we would expect more volatility in 2010 than in H2 2009.

Now, see the rest of their worries >>

First and foremost, the market is clearly concerned about a sovereign default, especially one in Greece.

Source: Deutsche Bank: 2010 Outlook

The correlation between stocks and the dollar is tight. Watch out for an unwind.

Source: Deutsche Bank: 2010 Outlook

In the meantime, the financial sector still remains huge, despite the crisis.

Source: Deutsche Bank: 2010 Outlook

In the US, financial profits still dominate the GDP, after a brief dip down

Source: Deutsche Bank: 2010 Outlook

Again, as a percentage of total US profits, the financial sector is heading back to nosebleed territory

Source: Deutsche Bank: 2010 Outlook

Source: Deutsche Bank: 2010 Outlook

In the UK, the ratios look even worse

Source: Deutsche Bank: 2010 Outlook

As for valuations, right now we're in the inflation sweet spot. But if things heat up...

Source: Deutsche Bank: 2010 Outlook

The market could easily resembl the post-Depression slog going forward

Source: Deutsche Bank: 2010 Outlook

Or worse, they could resemble Japan.

Source: Deutsche Bank: 2010 Outlook

And if you really want to be concerned, look at our demographics, and see we're going down the Japan path

Source: Deutsche Bank: 2010 Outlook

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