Market Outlook October

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The big picture has not changed. The world economy is twofold. Consumers are keeping up consumption and confidence indicators are favourable. Low unemployment rates and satisfactory wage growth support this scenario.

CEOs in the manufacturing industry are far more negative. Brexit, as well as the trade conflict between China and the United States, remain unresolved, and this causes uncertainty which puts a damper on the will to invest. However, the central banks are taking active steps and we saw new interest rate cuts in September. We therefore recommend maintaining a neutral weight between equities and fixed income within a portfolio. Within equities, we are underweight in defensive sectors, and in the fixed-income portfolio we have an underweight position in global fixed-rate bonds. Overall, we are cautiously optimistic.


Which equities sectors will have the best performance depends on the developments in the macroeconomic cycle and interest rates. This year, interest rates have fallen and the macroeconomic conditions have weakened. Sectors with stable earnings (defensive sectors) will benefit from this. Examples of such sectors are consumer staples and utilities; Coca-Cola and Colgate are large, well-known companies in these sectors. In the utilities sector we find electric power companies. Defensive sectors resemble bonds and will benefit from an interest rate drop. Cyclical sectors that are more prone to cyclical fluctuations become less attractive when uncertainty spreads. It becomes more difficult to estimate future earnings and the risk premiums go up. August was a good example of defensive sectors having the best performance, whereas the tendency in September has been the opposite. A combination of rate cuts from several central banks, better macro data, especially from the US, and the fact that the trade conflict between the US and China has not escalated, boosted the risk appetite in September. But what about the coming weeks? The most recent confidence indicators for the manufacturing industry did not make for pleasant reading. Business managers in the manufacturing industry are still negative. In isolation, this indicates keeping an overweight position in defensive sectors. However, the situation must be seen in relation to pricing and positioning.

Fixed income

Our view of the equities sector is also reflected in our fixed-income outlook. We have had an underweight position in global investment grade bonds and an overweight position in high-yield bonds. Although high-yield bonds have had satisfactory returns this year with an upswing of over 5 per cent, global investment grade bonds have done even better, going up more than 9 per cent this year. In the near future, we believe high-yield bonds have the greatest potential. The running yield of Nordic high-yield bonds is now in excess of 7 per cent. However, it is unlikely that the final yield will be 7 per cent as some losses will occur. Taking into account normal losses, there is still a good margin in relation to the running yield of investment grade bonds, which is at less than 3 per cent.