Investment year ending on a positive note

The positive synchronised development of the global economy is continuing. In practically all of the OECD countries GDP is currently rising, and even accelerating in most of them. This has already been factored in on the financial markets for some time, which means that the good market development has cast a positive vibe over almost the entire year. In the US equity markets, the S&P 500 index has risen +20.5% in dollars, but due to the weakening of the currency, euro investors’ returns failed to rise above +6.9% by the end of November. In Europe, the Stoxx 600 stock index has risen +11% from the start of the year. We will maintain the weight of the equity markets at neutral in our allocation products, with the small sales made this year balancing out the positive impact of rising stock prices on the portfolio (read more in our Allocation insight).

Interest rate movements were low in the US and Europe in November. No major changes were seen in central banks’ policies either. The Fed’s interest rate hikes are continuing now in December and next year will likely see two to three more hikes. Because of the recent slight decline in long-term interest rates, the yield curve has flattened in the US, predicting a calming down of economic activity on the markets and even a growth in recession risk. The growth outlook in the real economy is, however, still fairly good with low unemployment figures and companies’ confidence indices maintaining this cycle’s highs.

In the corporate bond markets, the tightening of credit risk premiums stopped, calming down the market situation somewhat. Companies have continued to actively enter the primary markets after the Q3 earnings season and plenty of new bond issues have taken place, also in the Nordics. There is still reason to be selective as, in many cases, low credit risk premiums, combined with a low interest rate level, in our view, make return levels ineligible for investment.

Once again, the equity markets rose to new all-time highs in the US, boosted by a good earnings season. Next year’s earnings forecasts for European companies have been raised slightly (to +9%), but in the US, forecasts have stood practically stock-still (+11%) in recent weeks. Sales growth forecasts have been raised a little in Western markets: to +5.4% in the US and +3.5% in Europe. The tax reform is moving forward in the US and the markets are expecting an improvement particularly in companies’ situations. The possible loosening of regulations governing the financial sector, a goal of the current administration, has also supported the banking sector. All in all, despite the rise in equity market pricing, positive earnings development has been the main driver supporting equities globally.

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

Market Outlook of August (PDF)

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