Higher American growth forecast
This past week was full of central bank policy meetings. The most intensive focus was on the US Federal Reserve (Fed), which presented a sharply higher forecast of US economic growth but meanwhile announced continued accommodative monetary policy − or pretty much what the financial markets were hoping for.
Because of the rapid vaccination roll-out in the United States and the giant "rescue package" just signed by President Joe Biden, the growth outlook for this spring looks very strong – a clear contrast to Europe, where news headlines are mostly about a third wave of COVID-19 transmission and new lockdown plans.
The Fed's forecast of US gross domestic product (GDP) growth in 2021 is now a full 6.5%; meanwhile the central bank signalled that it would not hike its key interest rate until 2024. This helped fuel a further rise in 10-year US Treasury yields to more than 1.75%. SEB has adjusted its long-term Treasury yield forecast to 2%, sooner rather than later this year. In historical terms, stock markets can cope with rising long-term yields but they perform best when yields are falling while growth is accelerating. So the absolute best stock market period is probably behind us.
At its policy meeting, the Bank of England indicated it will carry out an initial key rate hike in 2022, but we believe this may take more time. Norges Bank indicated a key rate hike in Norway by the end of this year, then two further hikes next year.
Turbulence in Turkey
There was far more financial market drama in Turkey, where the key rate was hiked from 17 to 19%, the central bank governor was fired by President Recep Tayyip Erdoğan, the Turkish lira traded lower – losing 15% of its value – and the stock market fell by more than 10%. So far, other emerging markets have been little affected by these events.
To read more about our current view of emerging markets, keep an eye out for SEB's Emerging Market Explorer, a research report that will be published on March 25 (tomorrow).
Restrictions extended in Europe's biggest economy
Germany has extended its restrictions until April 18 in an effort to blunt the third wave of the pandemic, and the country will also introduce a large-scale lockdown over Easter. This means that the gradual easing process that began earlier in March will be reversed. Italy and France are also introducing new restrictions, including a four-week lockdown in Paris.
The COVID-19 transmission trend is obviously moving in the wrong direction in many European countries, and there is a clear need to accelerate the pace of vaccinations. European Union leaders will meet on March 25 to discuss the current situation. The slow vaccination roll-out is leading to fears of another lost summer tourist season, and the European Commission has proposed the creation of a "digital green certificate" of vaccination, a negative test or recovery from COVID-19 in order to increase travel. Any such proposal must be approved by EU member countries and the European Parliament before becoming law.
Our market view
Recovery will support stock markets
Sideways movements in stock markets during the past few weeks are not only due to sluggish COVID-19 vaccine deliveries and new national lockdowns, but also worries about higher and higher US Treasury yields. In itself this is not surprising, since last year's sharp stock market recovery provides reason for caution. We are sticking to our cautiously optimistic view of stock markets.
In our main scenario, we anticipate a clear economic recovery starting this spring or summer, with solid growth at least well into 2022. Due to a combination of continued large stimulus measures and an accelerating economy, inflation risks are emerging on the agenda and thus also worries about a continued climb in government bond yields, especially in the US. We expect limited upturns in yields, but if they prove to be faster and larger than this, they may have a negative impact on the stock market mood.
In an economic recovery, cyclical value companies should be able to regain some lost ground, but looking further ahead the digitisation trend will continue to benefit growth companies. Sizeable worldwide investments in sustainability suggest that last year's strong performance for companies with this type of strategy may continue.
Share valuations today are undoubtedly high from a historical perspective but can be justified by lower interest rates and bond yields as well as a strong earnings outlook. These high valuations limit upside potential in the long term, but they are rarely a good signal to sell in a short-term perspective.
Continued potential, though a lot has been priced in
Given today's low interest rates and yields, it is hard to find good alternatives to stock market returns. Meanwhile, central banks and governments have established a floor by promising continued stimulus.
This suggests that the growth picture will have to become much worse, and/or yields will have to climb much more than expected, for major stock market downturns to materialise. However, profit-taking − with downturns of 10 or perhaps 15 per cent − will still be a natural element of this picture. We nonetheless expect positive, single-digit stock market gains this year.