Positive market signals
January turned out to be a mildly positive month for equity markets overall, despite new sources of uncertainty. The continued strengthening of the Swedish krona meant, however, that global equity indices ended just below zero percent when converted into SEK. The good news is that the krona, after a year of rapid appreciation, is now roughly in line with our forecast levels. This does not mean that the currency cannot strengthen further – primarily against the US dollar – but it does suggest that the major part of the movement is behind us. Consequently, going forward it will largely be the actual performance of global stock markets that determines returns on our international equity investments.
That global stock markets ended January in positive territory – despite turbulence surrounding Greenland, new tariff threats, tensions involving Iran, and the US operation in Venezuela – may seem surprising. However, the situation with Iran now appears to be de-escalating, and developments in Venezuela have very limited impact on the global economy. Moreover, the fact that the Greenland issue seems to be heading toward a resolution without aggression or increased tariffs not only offers a sense of relief but may also be interpreted as a sign that Trump is not entirely unaffected by international reactions or financial market developments.
Global economic growth
Regarding global growth prospects, we presented our updated outlook in last week’s Nordic Outlook. We noted that economic activity and markets are proving resilient, and we expect the world economy to grow by just over 3 percent both this year and next – a marginal upward revision to the GDP forecast. We view the inflation picture as stable in the US and benign in Europe and Sweden, and we expect the Federal Reserve to cut policy rates a couple more times during the year.
Positive market signals
The overall picture suggests that we may be heading for another good year in equity markets. The current earnings season – where companies report results for last year’s fourth quarter – appears to be delivering positive surprises, at least in the US. Large tech companies continue to act as key drivers, supported by robust earnings reports. Summarizing the Swedish reports published so far, the tone is also mildly positive. Recently, purchasing managers’ indices from several countries were released. In the US, the index indicates improved sentiment among industrial firms, and Swedish companies continue to signal solid optimism. The slightly brighter growth outlook also increases the likelihood that the relatively high profit forecasts for the current year can be met. Overall, the conditions suggest that equity markets should be able to generate positive returns – provided the outlook remains intact.
Optimism, but with risks
That said, risks remain. Growth and earnings may of course end up weaker than expected – for example, if consumption fails to gain momentum as anticipated. Much of the fundamentally positive view outlined above is also already priced in. After last year’s strong equity performance, market valuations have become somewhat stretched, and investor surveys indicate high optimism and already elevated equity allocations. This creates room for disappointment. Political uncertainty is also likely to persist for some time.
The risks mentioned above support the perhaps somewhat dull message of the importance of diversification, and the need to avoid concentrating too heavily in equities. However, the broadly positive outlook is equally clear in suggesting that maintaining meaningful exposure to stock markets remains a sound strategy.
Johan Hagbarth
Investments
Private Wealth Management & Family Office
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