Many flash PMIs for June are due this week
On June 22-23 (later today and tomorrow), preliminary purchasing managers indices for June are being published in Japan, the euro area, the United Kingdom and the United States. Most PMIs are expected to fall slightly, compared to May. In Europe, growth in the service sector is stronger than in manufacturing, while the opposite is true in the US.
The Nordic countries
Norges Bank making key rate announcement
Norway’s central bank is scheduled to make a key rate announcement on June 23. This past spring, Norges Bank signalled a more cautious path ahead due to high interest rate sensitivity among households: hikes of 25 basis points per policy meeting until the key rate reaches 2.50% (today it stands at 0.75%). But the bank could accelerate this path if inflation climbs or persists for longer than expected.
Our market view
External conditions affecting stock markets continue to deteriorate. Growth forecasts are being lowered, and an increasing share of macroeconomic analyses deal with a coming recession − not whether it will occur, but what it will be like and how it will impact financial markets.
High inflation is undoubtedly among the culprits in this drama. It keeps on frustrating the world’s forecasters by persisting and spreading throughout the economic system. It has had a major impact on consumer confidence and is also likely to reduce future consumption. At the same time, continued forceful pandemic-related lockdowns in China are reducing both consumption and production of goods – one factor that is contributing to global supply chain disruptions.
Our main forecast is still that central banks will successfully decelerate growth in major Western economies, whether in the form of soft landings or recessions. Quite obviously, we are facing a few quarters of weaker growth. It is also clear that inflation will remain high and central banks will hike their key interest rates quite aggressively in the coming months.
The US Federal Reserve, which has already raised its key rate more than once − most recently by a full 0.75 percentage points − will continue to set the pace, but the European Central Bank (ECB) and Sweden’s Riksbank will also be among those that hike their key rates in the future. As a result, bond yields have also risen rapidly and significantly. This may create some attractive situations for fixed income investors, but it is not good for stock markets, all else being equal.
Although this snapshot of the fundamentals is clearly worrying, there is still reason not to be quite so gloomy about the outlook for equities. After all, stock markets are forward-looking. This year's declines on almost all major stock exchanges are the result of a poorer outlook, and investors are adapting to worse conditions ahead. At this writing, one global stock market index has lost around 20% so far during 2022. The Stockholm exchange (which was one of last year’s winners) has fallen by around 25%. But is that enough?
The answer, of course, depends on future events − how deep and long the growth slump will be, and how high interest rates and bond yields will rise. History cannot tell us exactly how things will work out; each event is based on unique conditions, but guidance is available. Sometimes recessions are driven by specific phenomena or events (a pandemic, an oil crisis) that make comparisons difficult. But if we look at "ordinary" recessions driven by economic cycles, we see that the average stock market decline has been around 30%.
What conclusions can we draw?
Looking at stock exchanges, put simply we have discounted clearly weaker economic performance but not a full-blown recession – but we have already completed a fairly significant part of that journey. So if there is no recession, stock markets may be close to bottoming out sometime soon. If there is a recession, or if a growing proportion of investors expect such an increased risk, new stock market declines may lie ahead. Despite undeniable headwinds, optimists are noting that the market recently seems to have stabilised somewhat; negative news does not seem to be having as great an impact.
On the plus side, we also note that many investors have already divested their holdings and are negative about the outlook. This may sound worrying, but if you have already sold your shares and are prepared for worse times, there is less risk of negative surprises and new sell-offs.
Overall, there is an obvious risk that the situation may become a bit worse ahead, before it gets better. And the latter is important. Long-term investors are supported by the fact that stock market declines such as the current one have always, in principle, signified buying opportunities looking ahead a few years. But there is probably no hurry. And if you want to protect your equity-heavy portfolio against any further declines, it might make sense to look at fixed income funds. Higher interest rates and widening credit spreads – the extra rate companies have to pay for their borrowing − have created potential returns that look appetising in some cases.
Sofia Magnér and Johan Hagbarth
Private Wealth Management & Family Office