Market Outlook March

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2019 was a very good year in the stock market. This year also started well and we recently reached an all-time high. The stock market still expects satisfactory growth. The coronavirus news does not have a favourable effect.

The ultimate effects of the virus outbreak are difficult to foresee, but at least in the short term there is little doubt that growth will be weaker. This will also affect companies' earnings. We therefore think it makes sense to be a little more cautious with risky assets.

We have primarily reduced our overall regional equity exposure by lowering our equity weights within Emerging Markets, Europe, Norway and the Nordics.

When we wrote last month’s market outlook we still had an overweight position in equities, but we emphasised the need to monitor developments closely. The news lately has not been good. The virus has spread to Europe, and health authorities in several countries warn that the spread may be more severe than previously assumed. Although few people are affected, economic activity is affected to a much larger degree. People act differently and activity levels in the business community are reduced. We see this most clearly in tourism and transport, and the effect on international supply chains. The overall impact is difficult to determine at this point, but at least in the short term the effect on financial growth and companies’ earnings is negative.

Equities reached an all-time high in mid-February. Some sectors in particular had become expensive, but low interest rates, stronger sentiment indicators, reduced political risk and good reporting from the companies contributed to the upturn. A large degree of optimism was nevertheless factored in. This, in conjunction with the spread of the coronavirus, made us decide to move to an underweight position. The reason why we reduced Norwegian and Nordic equities, Emerging Markets and the European exposure, is that they are the most sensitive to weaker growth going forward. Although we are taking an underweight position in equities, is not all doom and gloom. Should the number of infected people stabilise and decline, economic growth will quickly pick up and the pause in growth will be short-lived. We constantly assess the potential return and risk.

The VIX indicator measures the 30-day expected stock market volatility. This has doubled so far this year as a result of the coronavirus. We therefore expect that we have to live with a large degree of uncertainty and volatile markets for a while, but we do not assume that this is the start of a recession and a more prolonged decline. The economies were too robust in the run-up to the past few days’ turmoil for that to happen.