US share prices and Treasury yields keep climbing
Wall Street has been in a cheerful mood this past week, with both the S&P 500 and Nasdaq Composite equity indices reaching new record highs. Market sentiment is being driven by positive corporate news and healthy macroeconomic figures. Fourth quarter company reports look set to end up clearly surpassing expectations.
Share prices are not the only thing rising in this optimistic environment. Long-term American bond yields have climbed, with 10-year US Treasuries reaching 1.16%. Brent crude oil prices are continuing upward, pushing past USD 60 early this week. COVID-19 transmission levels seem to be on their way down in many places, although lurking in the background are concerns that more highly contagious variants of the coronavirus may soon take over.
New Investment Outlook: Normalisation after an abnormal year
In the spring of 2020, the focus was on economic crisis and low valuations. Today it is on stimulus measures, vaccines and a hopefully bright future, but also much higher market valuations. Among positive factors, we are seeing forecasts of a high global growth rate and earnings increases as well as stimulative monetary and fiscal policies. Among negative factors are high absolute valuation levels, the often already aggressive positioning of investors and high total debt.
Read more about our current market view in the latest quarterly Investment Outlook report or in the summaries, and watch a short web video featuring our experts here.
The February 2021 issue also includes two theme articles that examine the health tech sector and the new EU taxonomy, respectively. Health tech is a fascinating field that employs cutting-edge technological and digital methods to create effective and inexpensive health care solutions. The taxonomy is one of several European Union initiatives to help drive our transition to a more sustainable society.
A focus on inflation
Aside from the worldwide struggle to vaccinate as many people as possible against COVID-19, one main theme of market reactions is the latest US fiscal stimulus package, its size and its potential inflationary impact. Larry Summers, who served as President Bill Clinton's treasury secretary, has expressed concern that Joe Biden's new USD 1.9 trillion "American Rescue Plan" might be too large and thereby risk generating high inflation, leading to a weaker US dollar and financial market instability.
President Biden's new treasury secretary, Janet Yellen, has responded by saying that the big risk is not doing enough to counter the pandemic. Yellen forecasts that the United States can achieve full employment as early as next year and that the Federal Reserve (which she previously headed) and the US government have enough tools to manage any upturn in the inflation rate.
The US consumer price index (CPI) is expected to climb steeply over the next few months (to about 3.5 per cent compared to 12 months earlier), mostly due to higher oil prices and base effects from low prices a year earlier. A surge in world market prices for food poses an inflation risk both in the US and elsewhere. In Europe, there have been large upside inflation surprises, but also unusual seasonal patterns. The cancellation of almost all January clothing sales in some countries due to the pandemic explains much of the strong January figure, and in our assessment this upturn does not mark the beginning of a new inflation trend.
Bitcoin hype and the future
Last year, the value of the cryptocurrency known as bitcoin rose by 360% and in January a new record price was set: over USD 40,000. Although bitcoin has been around for more than 10 years, there are still many question marks surrounding the currency and its future. What has driven its price higher right now, and is there any way of knowing how much a bitcoin should be worth? Are bitcoins and cryptocurrencies really just a big bubble? Check out the latest reflections on these issues by Chief Strategist Johan Javeus by clicking here.
Our market view
Recovery will support stock markets
Last year's sharp stock market recovery is reason for caution, but if economic growth forecasts prove correct while interest rates, bond yields and inflation are under control, there is continued upside potential for equities.
In an economic recovery, cyclical value companies should be able to regain 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.
It is not surprising that listed company earnings fell dramatically last year: globally by around 18%. This was a substantial drop, but still much less than had been feared earlier. However, for forward-looking investors, figures about future developments are more interesting. With an economic recovery in the cards and with low comparative figures for 2020, analysts ex¬pect earnings growth of around 25 per cent this year and more than 17 per cent in 2022. These forecasts seem reasonable, provided our growth expectations are met and the spread of the coronavirus is limited as expected. Continued vigorous central bank support and new fiscal stimulus measures are also included in this scenario.
Share valuations today are undoubtedly high from a historical perspective. These high valuations limit upside potential in the long term, but they are rarely a good signal to sell in a short-term per¬spective. We do not consider current valuations to be an immediate prob-lem, but neither do we count on higher valuations being able to push share prices up going forward, as earnings growth gradually normalises.
Continued potential, though a lot has been priced in
Investor surveys indicate that many fund managers already have a relatively high level of risk in their portfolios, including a higher percent¬age of equities than the historical average. Combined with val¬uations that already factor in a bright picture, this reduces the potential for large share price upturns. But stock markets rarely perform poorly in periods of good growth. Given ultra-low interest rates, the effects of TINA – There Is No Alternative – persist. Meanwhile, central banks and governments have established a floor by promising continued stimulus.
This sug¬gests that the growth picture will have to become much worse, and/or valuations will have to be really high, for major down¬turns 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.