Market Outlook: An eventful week, including central bank announcements

Our market view
 

In yesterday’s Swedish financial news, the Riksbank's interest rate hike drew far more attention than our own Investment Outlook, which makes perfect sense. But even though some headlines described it as a "monster hike", the market reaction has been fairly restrained.

After all, a big rate increase was expected, with the most common prediction being a 0.75 percentage point hike, but enough observers believed there would be a 1.0 point hike that the surprise effect of such an event would be small. We largely share the Riksbank's assessment that Swedish inflation will rise from today's 9% to around 11% this winter before peaking and that we will see some more rate hikes, though smaller in size.

Otherwise we refer the reader to Investment Outlook. The text below is from the introduction of that report, which describe our market view:

The first several weeks of summer offered a much-needed stock market rebound, after the powerful risk aversion that had prevailed during the first half of 2022.
But now that the holiday period is over, market turmoil is back – driven by a combination of factors.

Inflation remains high and central banks have clearly stated that they must prioritise tackling it, even though this will come at a cost in terms of economic growth and the risk of job losses. The Ukraine war continues to grind on, and an energy crisis is contributing to persistently very high natural gas and electricity prices, while oil prices appear to have peaked. The energy crisis is primarily plaguing Europe and is not as acute elsewhere in the world, such as in the United States. In addition,

China’s growth has slowed due to weak international economic conditions, a fragile domestic real estate market and the country’s continued restrictive COVID-19 policy. The overall result is that the global corporate sector is signalling tougher times, with uncertainty largely connected to future demand, that is, sales volumes. From a consumer perspective, cash flow has deteriorated rapidly as inflation has eroded purchasing power, with skyrocketing energy prices and rising interest rates as well.

Put simply, there are numerous major sources of concern on the horizon. The world’s macroeconomists have continued to downgrade their growth forecasts, with most of them agreeing that a recession is approaching. However, there is still considerable disagreement among analysts about how deep and prolonged it will be.

From a capital market perspective, it is thus reasonable to ask whether the above concerns have been sufficiently discounted by investors. One global stock market index in local currencies has fallen by around 17 per cent this year. Price-earnings (P/E) ratios have ended up at around 15, while US 10-year Treasury yields have climbed above 3 per cent and credit spreads for high yield corporate bonds have widened to around 5 per cent. Meanwhile one US dollar costs nearly 11 Swedish kronor.

In a shallow and short-lived recession, earnings contraction in the corporate sector is often limited. Today’s pricing of equities and corporate bonds has largely discounted this, which is also in line with our main scenario. But if the downturn results in a deeper and more structural crisis, it is reasonable to assume that risk aversion will increase again and that the negative stock market trend will persist. This issue of Investment Outlook provides a detailed look at our views about future market developments, risks and opportunities as well as appropriate portfolio structures.

In addition to our overall view of investment portfolios, of course we report on conditions surrounding individual asset classes and on their potential. This issue also includes three theme articles. The first is a review of our take on biotechnology, a cyclically insensitive sector with a growth profile. Our second theme article looks at how investors can identify which companies are actively engaged in the transition to a more sustainable world. Our third theme article looks at current conditions in China. The country is lagging behind its official targets. How do things look as we approach 2023?