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Risks and opportunities in 12 global financial segments

World financial markets are replete with risks and opportunities, making forecasts risky. Yet faint heart never won fair profit. So here goes!

One, US shale oil, offshore West Africa, Iran, Iraq and Libyan production causes a major oil glut as Saudi Arabia and the Opec refuses to cut its 30 million barrel output. As US rates and the dollar rises, hedge funds short Brent crude, which falls to $80.

Two, the speculative excesses in cloud computing, social media and e-commerce shares finally climaxes and burst. Facebook, Twitter, Groupon, Netflix, Pandora, Amazon, Yelp, etc lose 50 per cent of their value. Yet media deals will be red-hot on Wall Street as Comcast finally acquires Time Warner Cable and Sony spins off its Hollywood assets.

Three, France goes into recession as industrial production and services fall, leading to a political crisis in the Elysee Palace and deterioration in relations with Germany. The global markets short French government bonds and OAT yields soar above the German Bunds. Paris blames EU deficit demands and the influence of hard money Bundesbank zealots on the ECB. The euro plummets to 1.30 against the dollar as French-German acrimony unsettles markets.

Four, the VAT sales tax and awful demographics (Japan is the only country in the world where adult diaper sales exceed baby diaper sales) causes Japanese GDP growth to decelerate sharply in Q1. This, in turn, forces Bank of Japan Governor Kuroda to expand the scale of the world’s most aggressive quantitative easing program. As Japan’s monetary base balloons even while US Treasury yields rise, the yen plummets in value, the final act of Abenomics, to 120 against the dollar. The Nikkei Dow hugely outperforms Wall Street and Europe.

Five, as junior mines all over the world shut down, gold finally finds a bottom in the $900-$1,000 range. However, the growth in global auto markets and industrial production means platinum and silver continue to outperform gold.

Six, GCC banks were stellar outperformers in 2013, up 25 per cent even as their emerging market peers got slammed. However, a fall in oil prices, unrest across major Arab economies in the Levant/North Africa, central banking curbs on property and retail lending and major losses on Treasury bonds/sukuk holdings cause severe correction in GCC banks shares. Saudi Arabian banks Samba and Al Rajhi emerge as sector outperformers even as the Tadawul is the winner index for 2014. GCC telecoms, utilities and cement shares remain losers.

Seven, Ukraine is the focal point of renewed Russian geopolitical tensions with the EU and the US, as riots in Kiev and unrest in the Caucasus mars the Kremlin’s showcase Sochi winter Olympics. A savage bear market in Russian equities, debt and ruble is amplified by the fall in the prices of gold, oil, gas and metals.

Eight, as US Treasury yields rise, the Bank of Canada reacts dovishly to inflation data, West Texas and Canadian select crude remains soft, the Canadian dollar continues to deteriorate against the US dollar, falling to 1.08 by April.

Nine, recent euro strength has been due to the shrinkage in the ECB balance sheet due to LTRO repayment by German banks even as deflation haunts the peripheral Europe economies. President Draghi can no longer rely on verbal intervention and the euro plunges to 1.30.

Ten, even though China’s Shanghai Composite Index has fallen for the fourth year in succession, the People’s Republic is a valuation Cinderella in Asian shares. MSCI China now trades at nine times forward earnings, its widest discount to Asia ex Japan since Lehman’s failure. The Politburo’s reform agenda is credible. Unlike India, China faces no funding risk as the Fed taper and Shanghai trade at a 40 per cent discount to Dalal Street. Is the Year of the Horse the year the Middle Kingdom finally gallops?

Eleven, Argentina was an investment basket under its Peronist government, with chronic inflation, sovereign debt defaults, capital and price controls and arbitrary expropriation. However, 2014 is the year the political regime in Buenos Aires changes. The world discovers Argentina is a shale oil colossus. Oil firm YPF shares doubled in 2013 even though the Peronist government expropriated Repsol’s majority stake in YPF. The richest man in the world (Carlos Slim) is accumulating YPF, whose shares double again in 2014 to $58.

Twelve, the biggest black swan in 2014 will be a savage property correction in Hong Kong, India, the Gulf, Las Vegas, Britain and South Florida. Rising interest rates are to property bubbles what sunlight is to Dracula. 2014 is the year bubble gum financiers get bloodied by the wildly overvalued housing bubbles worldwide again.