COP26: New climate pact adopted
On Saturday evening, November 13, the United Nations Climate Conference (COP26) in Scotland ended after two weeks of negotiations. Nearly 200 countries reached agreement on the new Glasgow Climate Pact, aimed at keeping alive the Paris Agreement’s target of limiting global warming to 1.5 degrees Celsius. The agreement includes rules on carbon trading and common emissions reporting standards. Another major issue that was discussed is funding by advanced economies for climate work in emerging market economies. China and India made last-minute changes concerning the reduction of coal-burning that disappointed many countries. Instead of calling for “phasing out” coal, the final text of the climate pact says that coal will be “phased down”.
According to Bloomberg, prices of European carbon permits rose to a new record of some EUR 67 per tonne during the first trading day after the climate conference, up nearly 6%.
The United States
Last week’s American inflation figures
On November 10, new US consumer price index (CPI) figures temporarily pushed the S&P 500 equity index lower while US Treasury yields climbed. American CPI inflation rose to 6.2% year-on-year in October, its highest for more than 30 years.
The Nordic countries
Swedish inflation rose more than expected in October
Swedish inflation continues to rise and is now at its highest level since autumn 2008. Measured as CPIF (CPI minus interest rate changes), inflation ended up at 3.1% year-on-year during October, which is above the Riksbank’s 2% target. The Swedish central bank expects inflation to climb further in November and then fall, but we believe it will take substantially higher core inflation to persuade the Riksbank to begin hiking its key interest rate.
New Nordic Outlook: Recovery, with speed bumps
Global economic growth is encountering resistance from an overextended production system, continuing pandemic-related disruptions and energy price shocks. In SEB’s latest quarterly Nordic Outlook macroeconomic report, which was published yesterday (November 16), our economists have slightly lowered their global growth forecast for 2021 but are leaving their 2022 forecast unchanged.
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.