Market outlook for November

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The international growth picture remains favourable for equities and other risk assets, which influences corporate earnings. Inflation is low, and the central banks can be prudent in their interest rate setting. This indicates a positive attitude toward equities. However, prices have been rising in the stock markets for a long time, and there has been no correction for quite a while. Credit premiums are low, and equity prices have passed most price targets. After an overall assessment, we recommend a neutral equity exposure. We have also decided to retain our outlook for both the equity and fixed-income portfolios.

Synchronised growth

The leading economies experience that the favourable growth picture is taking hold. The growth in the global economy is expected to be above 3.5 per cent both this and next year, while it has been lower in recent years. There is a decline in unemployment and an increase in international trade, investment and manufacturing production. Surveys among businesses and consumers also show that optimism is rising. However, there are still challenges, and the situation is vulnerable. High debt levels in China and stretched pricing in several securities markets are two examples. In the short term, however, we believe that the positive picture will prevail over the long-term challenges.
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.

Continued low inflation

Inflation has remained low. Still, there are some differences between regions. Inflation in the United States and Norway is declining further. In the Eurozone, the growth rate is stable, while it is rising in the United Kingdom. A simple projection indicates that the 12-month US inflation rate will stay low well into next year. However, we believe that it will eventually pick up. Wage growth is an important driver for inflation. As the labour markets are tightening, wage growth will gradually increase.

Central banks

As expected, the ECB announced a reduction in its asset purchase programme on 26 October, whereby bond purchases will be halved from EURO 60 billion to EURO 30 billion per month as from January. The ECB will continue asset purchases at the new pace at least until September 2018. The interest rates on the main refinancing operations and the deposit facility will remain unchanged at 0.0 per cent and -0.4 per cent, respectively, and will be maintained at these levels "for an extended period of time, and well past the horizon of the net asset purchases" (quote from the ECB). These announcements are in line with our expectations and do not change our view to retain an overweight position in European equities. Nor do they occasion any material changes in the market's pricing of the ESB’s key policy rate, which means that the fixed-income market prices in the first interest rate increase three years ahead.

The Federal Reserve (FED) has come further in the cycle with respect to reducing/reversing its stimulus programme. Here, interest rate increases are relevant, as the period of reducing bond purchases is over. The FED’s interest rate path indicates that interest rates will be raised once more this year and three times next year. We think the next interest rate increase will be implemented in December this year. This will also give FED chair Janet Yellen the opportunity to present a new analysis of economic developments. The fixed-income market prices in fewer interest rate increases than suggested by the FED – only one and a half. We believe in more interest rate increases than this, and envisage a rise in market rates ahead. Accordingly, we maintain our underweight position in global investment grade bonds.

As expected, Norges Bank held its policy rate unchanged at 0.5 per cent on 26 October and stated that developments since the previous interest rate meeting have been roughly in line with what the central bank envisioned. Our interpretation of this is that Norges Bank’s current interest rate path remains in force. The interest rate path indicates that the first interest rate increase will be implemented around the middle of 2019, while market rates price in the first interest rate hike at the end of 2018/beginning of 2019. We share the view that Norges Bank is unlikely to raise its key policy rate until well into 2019, which underpins our overweight position in Norwegian investment grade bonds. 

Strong corporate earnings

At the time of writing, around half of the companies in the United States and Europe have released their results for the third quarter of the year. The main impression is that the economic upswing appears to influence companies’ financial performance. This is also a prerequisite for stock market returns. In the United States, there is a particularly favourable development in the technology sector, where companies deliver clearly better figures than expected. This sector also provided the undeniably best returns in October. However, we also see a satisfactory trend in financial performance in several other sectors. We recommend an overweight position in the finance, technology and energy sectors and an underweight position in defensive sectors such as supply, stable consumption, telecom and real estate. While the more offensive sectors benefit from the economic upswing, the defensive sectors are more vulnerable if interest rates rise. The defensive sectors are often characterised as bond proxies. When interest rates fall, these sectors tend to do better than the more offensive sectors. In other words, they have some of the characteristics of a bond, which also benefits from declining interest rates. The finance sector benefits from increasing interest rates. An increase in interest rates makes it easier for the finance sector to maintain its margins and thus increase earnings. Since we believe that US interest rates are on the rise, there is reason to have an underweight position in defensive sectors.

Stretched pricing

We have written several times that prices appear high in most stock markets in relation to various price targets. For example, there has been a 16 per cent increase in prices on Oslo Børs this year, which has not resulted in any changes in expected earnings. This gives a higher price/earnings ratio. Seen in isolation, the pricing indicates that we should show caution in the stock market. The fact that we nevertheless recommend a neutral weight in equities is due to the clear improvement in the growth picture. A characteristic feature of 2017 that growth has increased though inflation has not. This climate is often favourable for the stock market. When looking at the stretched pricing on the one hand and the favourable growth picture with no significant rise in inflation on the other hand, we choose a neutral weight for equities

Norwegian high yield bonds still look favourable

Norwegian high-yield bonds have generated a yield of approximately 13 per cent over the past year. Such high yields cannot be expected to prevail. The current yield is about 6 per cent. We think there is a good chance to realise such a yield in the period ahead based on stable growth prospects and a higher oil price.


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