In the interests of going against base-case thinking, UBS has issued the following list of plausible market surprises it feels might (just) happen in 2010.

So, without further ado here they are:

And, to compare, here are the bank’s base-case scenarios:

One of the more interesting surprises we would say is definitely the idea Japan might turn into an equity darling in 2010, considering the country’s economic performance currently remains very much underwhelming.

Furthermore Japan still has deflation, a declining population and a weak export sector to contend with.

UBS admits they see little reason to believe there will be a wave of demand of Japanese equities.

Nevertheless there is one factor they say might change matters significantly: dollar strength.

As they note:

If the dollar were to recover against the yen, demand for Japanese goods could pick up, boosting exporters’ revenues. Additionally, the proximity of emerging Asian countries, where demand is expected to remain strong, would benefit Japan as well, especially in an environment of yen weakness.

Of course, demographics are against them. Many analysts expect the yen could stay supported by an ageing population increasingly drawing on dollar savings in a low US interest-rate environment.

The immediate effect of such repatriated flows, of course, is yen strength.

But back to the UBS surprise list. Here for reference is how the bank’s 2009 plausible yet unexpected scenarios fared:

Corporate default rates don’t rise much

Did it happen? No.

Oil prices fall below $20 per barrel

Did it happen? Not quite.

The dollar falls to new lifetime lows

Did it happen? Almost.

Breakeven inflation rates remain near zero

Did it happen? No.

Negative global growth

Did it happen? Yes.

Emerging markets regain parity valuations

Did it happen? Just about!

Equity ‘fallen angels’ soar:

Did it happen? Yes!

An Obama ‘tax holiday’:

Did it happen? A little bit.

Gold goes to $300

Did it happen? Not even close!

This entry was posted by Izabella Kaminska on Wednesday, December 16th, 2009 at 10:04 and is filed under Capital markets. Tagged with emerging markets, japan, ubs, vix. Edit this entry.