Market outlook February 2018 - Growth optimism continues

illustration photo

January was a good month for our market view, with rising long-term government rates, weaker dollar and stronger Norwegian krone, higher commodity and energy prices, and falling risk premiums in both equity and credit markets. The risk appetite in the markets is high and negative news does not seem to bother the markets. Neither budget problems in the United States, Merkel's challenges in forming a new parliament, or US customs on solar panels and washing machines have affected the markets. Our technical indicator provides a significant signal that the stock market has been over-bought. Sentiment is therefore shifted to red in the risk weight as it is used as a contrarian indicator in our market view. The other indicators are; valuation of stock markets which is already in red, liquidity in yellow and global growth in green.


Growth optimism remains high and earnings estimates have continued to have a positive trend from 2017. In spite of the change in our risk weight, we make no changes in our market outlook this month. The IMF published a new edition of World Economic Outlook in January. Growth estimates for 2018 and 2019 were both revised upwards by 0.2 percentage points to 3.9 percent. The increase is mainly due to improved growth prospects in the US, Eurozone and Japan. However, the growth forecasts for emerging economies overall were kept unchanged.

The matrix above shows recommended short-term deviations from a balanced portfolio across multiple asset classes. Deviations from the long-term distribution should not represent more than 5 to 15 per cent of the total portfolio to ensure that the short-term risk taking is not too dominant. The scale must be seen in the context of investors’ risk willingness and investment horizon.

Earnings estimates are revised up in the United States
The analysts continuously revise estimates for US companies after US tax cuts were adopted about a month ago, and companies are now reporting results for Q4 last year. Total growth estimates for 2018 are currently revised up from about 11.7 to 16.7 per cent. Energy, finance, telecom, cyclical consumption and industrials are the sectors most adjusted in the US. Technology, stable consumption, utilities and real estate, on the other hand, have been slightly changed so far. Cyclical sectors are currently looking to make the most of the tax cuts, but higher interest rate and oil prices may also have contributed to upgrades in finance and energy. Technology is an exception as the effective tax rate is already low. Uneven upward revision of telecommunications indicates that several effects may have contributed.The market outlook is underweighted stock markets in the US as this is the most expensive market on pricing. The tax cuts are partly non-recurring effects that initially raise earnings in the short term. If this makes the investment willingness of American companies to increase, this can contribute to higher earnings growth in coming years as well. However, this remains to be seen, many are still skeptical. The appreciation in stock markets this year has been stronger than the increase in EPS estimates, so the P / E multiplier has risen further. However, this is also the case in other regional stock markets.Weaker dollar, stronger NOK
The weakening of the dollar has probably surprised many market participants. Many strategists have been expecting a stronger dollar as the US central bank is likely to raise its policy rate several times this year. This is because inflation is expected to recover somewhat, while the labor market is tightening. In addition, growth has picked up at the same time as tax cuts may potentially increase the willingness to invest.
However, the markets have also focused on increasing public budget deficits as a result of tax cuts. The offer of US government bonds will thus increase while the central bank gradually reduces bond holdings. Interest rate rises caused by liquidity and not higher growth expectations may be negative for the currency.
However, the markets have also focused on increasing public budget deficits as a result of tax cuts. The offer of US government bonds will thus increase while the central bank gradually reduces stock holdings. Interest rate rises caused by liquidity and no higher growth expectations may be negative for the currency.
In addition, both the Euro and Yen have strengthened as a result of speculation about possible changes in monetary policy. The reason for this was, among other things that the Japanese central bank adjusted down the bond purchases from the interest rate control strategy. It is also expected that the European Central Bank will communicate more information about the bond purchase programs before the summer. These are foreseen to continue until the month of September. Experience with quantitative easing has shown that both interest rates and currencies can move a lot ahead of such announcements. A weaker dollar is often positive for global growth, especially for emerging economies, as well as energy and commodity prices, as we have seen in the market movements in January.
The Norwegian krone has strengthened since mid-December following its weakest level since the financial crisis against the euro. Several factors have contributed to the strengthening of the krona; higher oil and commodity prices, the raising of the interest rate path by Norges Bank in December, higher inflation than expected and a tighter labor market. The fear of a broad fall in housing prices in Norway has probably also declined following Eiendom Norway`s publication of revised housing price statistics for the new year. We are overweight Norwegian and Nordic equities, based on our currency and cyclical stance.
Man against machine
Demographic conditions in combination with a long period of lower economic growth rates following the financial crisis have slowed inflation growth. The cyclical conditions indicate that inflation will pick up, but disruption from new technologies can cause significant deflationary impulses through creative destruction.
Major technology companies have possibly begun to realize that they also have a social responsibility. According to Bloomberg, several of the companies had a more humble attitude at the World Economic Forum in Davos this year. The list of criticisms has increased; other states' abuse in national elections, dissemination of misinformation and extremist content, lack of privacy, breach of competition law, major tax adjustments, and in addition, job security is threatened in several industries. Some also point out that excessive use of smartphones and addiction to social media can cause adverse health effects. Because of this Facebook has announced that algorithms that spread news are changing so users will spend less time, but get more quality time in front of the screen.
Currently, the technology sector accounts for just under 20 percent of MSCI AC World, and slightly less than 30 percent of MSCI Emerging Markets. Technology companies may risk increased regulation and supervision that can go beyond some business models. However, as major technology companies often operate across national borders, it is difficult to implement this quickly. In the market view, the technology sector has been overweight for a long time, and it is maintained as the structural recovery does not seem to diminish even if the risk increases. The sector also provides a certain level of protection against deflationary impulses.



This presentation, report or other material attached to it (the “Information”) is prepared by DNB Private Banking, DNB Bank ASA. DNB Private Banking is a division of the business area Wealth Management. DNB Bank ASA is part of the DNB Group. This Information is intended for the recipients only and is not for re-distribution. Persons receiving this Information must not further distribute or send this Information in or into the United States, Canada, Australia or Japan. Any re-distribution of this Information may constitute a violation under the relevant national securities laws.

The Information is intended as general guidance only and should not be relied upon as legal, financial, commercial, tax or accounting advice. The Information is further not intended as a personal recommendation of any kind, and does not constitute personal investment advice. The recipient of this Information must not make any strategic decisions on the basis of this Information, and should make their own individual assessments of whether any strategies or concrete actions are suitable or appropriate. Such independent own-assessment should be based on the recipient’s relevant knowledge and experience, financial situation and investment objective. If deemed relevant, each recipient of this Information should refer to its legal, financial or commercial advisors for specific and detailed advice.

DNB Private Banking does not warrant that the Information is exact, correct or complete, and does not undertake any obligation to update the Information. DNB Private Banking does not accept any responsibility for direct or indirect losses that are due to the interpretation, and/or use, of this Information.

DNB Private Banking and the DNB Group have incorporated internal rules and regulations in order to avoid, prevent or handle any potential conflicts of interest. DNB Private Banking or DNB Asset Management AS, a part of the DNB Group, or other entities within the DNB Group receive inducements or retrocessions when distributing mutual funds, vehicles for collective investments and other financial instruments and financial products. The inducement or retrocession will depend on the agreements with each management company or product contractor. DNB Private Banking or DNB Asset Management AS will generally receive a higher amount when distributing DNB-products than other external products.

Customers of DNB Private Banking will have access to a range of securities funds and other vehicles for collective investments managed by management companies outside the DNB Group. The selection of which external securities funds and vehicles for collective investments made available to clients is performed by DNB Asset Management AS.

Management Companies with whom DNB Private Banking has entered into a distribution agreement with may be customers of the DNB Group.

DNB Bank ASA is registered in the Norwegian Register of Business Enterprises (NO 984 851 006) and is under supervision of the Financial Supervisory Authority of Norway (Finanstilsynet). Details about the extent of our regulation by local authorities outside Norway are available from us on request.