Market Outlook December

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We maintain our overweight in equities going into December. Currently, there are more pros than cons with regards to equities.

Growth impulses are having a positive effect on the margin, the central banks say they will continue with economic stimulus and US earnings for the third quarter were satisfactory. The prize for taking risks in the equity market relative to the fixed-income market is also high: thus, we have a 'hunt for yield' argument in favour of equities.

We have a clear cyclical tilt in our equity exposures as exemplified by our latest addition of the European 600 Bank ETF exposure. Within fixed income, we prefer investment grade and high-yield bonds. High-yield bonds are also a reflection of our preference towards shorter duration within fixed income.

Will the arguments for the overweight position in equities hold up for a while to come? We believe they will. Let us elaborate further:

The geo-political risks have dampened. President Trump postponed the planned tariff increase in October and is considering skipping the one he announced for December. Our assessment is that Trump is going to become more and more cooperative the closer we get to the next presidential election in November 2020. The opinion polls show that he needs all the help he can get, as these polls do not make for pleasant reading for the Trump campaign. Trump's signing of the Senate bill for an annual assessment of Hong Kong's independence was, naturally, not well received in Beijing. At the same time, we do not believe it will hinder a somewhat more favourable climate between the two major powers in the time ahead.

As for Brexit, we believe the chances of the UK leaving the EU without a deal have become very slim.

The central banks are implementing several measures. The stimulus from the central banks is still evident, both as regards to the key policy rates (short-term interest rates) and quantitative easing (long-term interest rates). They are also taking non-traditional measures, such as the ECB's extraordinary reasonable loans to the banking industry. The central Bank of China has also recently cut the key policy rate for the first time in four years.

Signs of growth in the manufacturing sector.  The manufacturing sector has been the weak link of the world economy for several months. We see it both in the confidence indicators and in the actual growth in manufacturing production. Now, however, we see that the Purchasing Managers’ Indices for the manufacturing sector have actually improved over the last four months, and the increase is broadly distributed across the world regions. Our assessment is that the manufacturing sentiment is to a strong degree pulled down by the trade war between the US and China. We believe that a more favourable development here can provide further improvement in the manufacturing sentiment.

Aside from that, there is still good momentum in the US private consumption and housing market – the former constitutes roughly 70 per cent of the US GDP.

The US Q3 earnings have been better than expected. Admittedly, the company earnings for the third quarter have not been particularly good, but numbers have been better than expected. All in all, our assessment is therefore that the development in earnings is not weak enough to change our positive outlook on equities.

Ultra-low interest rates. Interest rates are at a historically low level. The ten-year US government bond rate has for instance dropped from 3.2 per cent to 1.7 per cent over last 12 months. With such low interest rates, the equity market emerges as an attractive option for investors.

So what do we think about the interest rates in the time ahead?

So what do we think about the interest rates When the interest rate level is as low as it is now, the chances of further interest rate declines are limited. And although we do not envisage a marked interest rate rise in the near future, the sample space for the interest rates is asymmetrical; the possibility of an upturn is greater than that of a downturn.

This – combined with our preference for owning short over long-term fixed-income securities – In addition, we have an overweight position in high-yield bonds, mainly Norwegian and Nordic High Yield. This is because we believe it is right to reap the high-risk premium in this market relative to the investment grade market, as we do not envision a large increase in defaults in the high-yield market.