Summing up the first week of the UN Climate Conference (COP26)
The United Nations Climate Conference (COP26) in Glasgow, Scotland, began on October 31 and is now well into its second and final week. During the first week more than 100 countries (including Brazil, China and the US) pledged to reverse deforestation by 2030. Some 40 countries agreed to phase out coal-fired power plants, and at least 80 countries have promised to reduce methane emissions. India – the world’s fourth-largest carbon dioxide emitter – declared that it would seek to achieve net-zero emissions by 2070. This week the conference will deal with economic and trade issues. The agenda includes trading in emission rights, climate finance and reporting requirements.
The United States
The US Congress passes President Biden’s infrastructure package
Congressional Democrats – with a little help from Republicans – finally succeeded in passing President Joe Biden’s infrastructure bill. It is the second of Biden’s three major legislative packages and totals USD 1.2 trillion. But the House of Representatives continued to block Biden’s third big package, which includes social and climate spending and now totals about USD 1.75 trillion (originally USD 3.5 trillion). The non-partisan Congressional Budget Office (CBO) has been tasked with conducting a complete cost analysis of the bill, and Democratic leaders are hoping to pass it in the House next week and in the Senate before Thanksgiving (November 25).
American jobs report stronger than expected
The US jobs report published on November 5 was stronger than expected. Non-farm payrolls rose by 531,000 in October and unemployment fell to 4.6%, while the labour force participation rate held steady at just below 62%. On November 10 (later today), the Bureau of Labor Statistics will release American consumer price index (CPI) figures for October. September CPI was up 0.4% month-on-month and 5.4% year-on-year (a 13-year high). The market consensus is that the October CPI will be even higher.
The Nordic countries
Norges Bank key rate announcement entirely in line with expectations
Unlike the Bank of England, which surprised markets by keeping its key interest rate unchanged at 0.10% − and not hiking it to 0.25% as anticipated – on November 4 Norges Bank made a rate announcement that was entirely in line with expectations. The Norwegian central bank left its key rate unchanged at 0.25% and repeated that it would “most likely be raised in December”.
Our market view
October was a strong stock market month, with upturns of around 5% for both world equity indices (measured in local currencies) and for shares listed in Stockholm. Among the winners were American tech companies and Swedish small caps, while emerging markets generally experienced a tougher month. Because of the rebound, several indices (especially in the US) again showed all-time highs in October, despite weakness in September.
Among the drivers of the September downturn were somewhat weaker macroeconomic statistics than anticipated, while inflation – which climbed during Q2 – has persisted at higher levels than expected. Slower economic growth and higher inflation (=risk of higher interest rates) is undoubtedly a toxic combination for stock markets. Adding soaring energy and commodity prices, China's real estate crisis and tighter government regulations, global bottlenecks in goods production and worries about the phase-out of stimulus programmes (especially the tapering of bond purchases by the Fed), we have ample explanations for September’s stock market blues.
In this perspective, the recent recovery may be surprising, but although the outlook is now far more uncertain there is still fundamentally good potential for equities. Economic growth will remain healthy, although forecasts are being adjusted downward a bit amid the prevailing turbulence, while interest rates are likely to remain low. Inflation is naturally a source of concern – if it gets stuck at high levels, along with continued high commodity prices and so on, it will create clear headwinds. Yet there are indications that many of these effects are related to the reopening of economies after the COVID-19 pandemic and are of a transitory nature. The ongoing report season is also helping to sustain share prices. Third quarter corporate reports are continuing to surprise on the upside, though not as much as during the previous quarters.
The Fed is expected to reduce its bond purchases soon, but is also likely to be sensitive to events in global financial markets – for example if problems in China have a larger international impact.
Market turmoil may, of course, continue for some time and new downturns cannot be ruled out. However, we do not expect that what is happening, assuming the situation does not clearly worsen, will have any significant effect on either global economic growth or corporate earnings. The fixed income market has also been relatively stable, which in itself is probably a signal that investors are not so worried about sharply rising inflation. Equities will thus continue to enjoy strong fundamentals – including healthy growth and low interest rates.
From recovery to normalisation
In this context, it is important to bear in mind that the economy − and financial markets − are now moving towards a new phase in which powerful and fairly straight-line upturns in growth and corporate earnings during the recovery will now give way to a period of normalisation. During such a transition, problems like the ones we are now seeing often arise. In the short term, the big question for future market performance will be how existing inflation and bottleneck risks play out, along with the corporate earnings and future guidance presented during the current report season. Looking further ahead, the key question will be how the normalisation process is working − how quickly economic growth will fall to more normal levels and how much interest rates and bond yields will climb during this phase of the economic cycle.
In recent months we have signalled a slightly increased level of caution by lowering the proportion of equities in the portfolios we manage. But we still hold slightly more equities than in a normal situation. This reflects our view that growth will still remain healthy during the coming year and that increases in interest rates and yields will be relatively limited. However, the time is ripe to adjust our future expected return figures lower − compared to the sharp recovery since last spring − and to prepare for more volatility ahead, both in stock markets as a whole and between different sectors and styles/types of equities. In other words, more turbulence may be waiting around the corner, but as long as positive fundamentals persist, we should probably view downturns as buying opportunities.