Companies’ confidence index peaks behind us – growth outlook still good

The current global economic growth situation anticipates +3.7% GDP growth for this year, but it seems that companies’ best confidence index levels lie behind us. Obviously, the results of surveys cannot improve forever. The improvement in credit risk premiums correlates strongly with the actual return and activity, which is why they need monitoring. Companies’ earnings growth outlook is still excellent: the US anticipates earnings growth of as high as 19.5% for this year. In our allocation products, the equity weight is currently close to neutral (read more in our Allocation Insight).

The money markets’ operating environment will change dramatically this year when the central banks’ ultra-light monetary policy ends. The Fed is actively reducing its balance sheet, in addition to interest rate hikes. It appears that the ECB will end its bond purchases in October and the first interest rate hike is factored in for the first half of next year. Smaller independent central banks will probably need to tighten their policies also, to avoid causing too much change pressure on the currency markets. For now, real inflation has been moderate in the US and Europe, so central banks have shown moderation in pulling back from stimulus measures. In the US, the Fed’s actions are clearly ahead of Europe, which has impacted the historically large transatlantic interest rate differential. It has a direct impact on the rise in the dollar’s hedging costs from the perspective of European and Asian investors. At the moment, Europeans are annually paying approximately 3% in hedging costs against the weakening of the dollar.

Despite the very strong earnings growth and global economic growth outlook, equity market prices levelled out after the powerful upward surge last year. The operating environment is changing and the best figures in companies’ confidence indices lie behind us. After the US corporate tax reform, up to 19.5% earnings growth is expected in the US S&P 500 index for this year and +8.4% earnings growth for Europe’s Stoxx 600 index. On the emerging markets, earnings growth expectations lie somewhere between these two figures, at about +15%. The first act of the trade war is underway, played out mostly between the US and China. The Trump’s administration sees itself as promoting the interests of Americans, but an extensive trade war would be in nobody’s interest. Nervousness is thus the word of the day on the equity markets.

Juhani Lehtonen, Head of Fixed Income & Market Strategy Investment Solutions

Market Outlook of August (PDF)

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