27.01.2021 09:58

Market Outlook: Both setbacks and advances

Many people breathed a sigh of relief when the inauguration of Joe Biden as president of the United States took place on January 20 without further riots. They were also pleased that the corporate report season has begun on a promising note. Yet we are still in a situation where the spread of COVID-19 is serious enough to result in restrictions being extended, while vaccine roll-outs are still progressing very slowly, especially in Europe.
So far this year, the MSCI World equity index has gained about 3.1 per cent in US dollars.

The corporate report season - so far so good

As of January 26 (yesterday), 69 of the 500 companies in America's S&P 500 equity index had published their reports for the fourth quarter of 2020. On average, both sales and earnings have been better than expected, but so far this has not led to upward revisions in earnings forecasts.

Ahead of the report season, the expectation was that full-year 2020 earnings would be down 18% from 2019. So far, reports from US banks have shown better earnings than expected, while the performance of tech companies has been mixed. Intel and IBM share prices fell 9-10% after their respective reports, while Apple's shares have climbed to a new record and Netflix gained 11% after its report. Apple and Facebook will publish their quarterly reports on January 27 (today).

The United States – not so quiet on the western front

Joe Biden's presidency got off to a roaring start as he reversed numerous earlier decisions by his predecessor Donald Trump. Biden's actions included applying to re-join the 2015 Paris climate agreement and resuming collaboration with the World Health Organisation (WHO). Read more about several dozen of the president's proposed actions in the Democratic election manifesto Joe's vision.

Former Federal Reserve chair Janet Yellen has now been confirmed by the Senate as the new US Secretary of the Treasury. She supports the idea that the advantages of large new economic stimulus packages currently outweigh the costs of higher government debt. In her Senate committee testimony, she warned that it is unacceptable for any country to manipulate its currency to make its exports more competitive. Some senators also pressed Yellen for details on future tax increases aimed at funding new US infrastructure investments, but she provided no clear answers on this matter.

COVID-19 – glitches in the vaccination machinery, but more coordination

After a slow start for vaccination roll-outs, the European Union has set new targets: its 27 member countries will try to vaccinate 80% of all health and social care professionals and all people over age 80 by March 2021 and a minimum of 70% of the adult population by summer. There are also continued discussions about vaccination certificates, which may facilitate the task of resuming more normal travel.

Meanwhile both AstraZeneca and PfizerBioNTech have warned that they are likely to deliver fewer vaccine doses than expected during the first quarter of 2021, due to production problems. So far the EU has approved the PfizerBioNTech and Moderna vaccines and it is expected to approve the AstraZeneca vaccine shortly.

Nordic Outlook – a world marked by setbacks and advances

On January 26 (yesterday), SEB published the latest quarterly Nordic Outlook research report. COVID-19 vaccine roll-outs and powerful stimulus measures are laying the groundwork for a rapid recovery, once the pandemic releases its grip on the world economy.

Despite the escalating spread of infection and expanded restrictions, late 2020 was not as weak as previously feared. The full-year 2020 decline in global GDP is expected to be only 3.7%, compared to our November projection of 4.4%. We have marginally downgraded our 2021 forecast to 5.0%, while adjusting 2022 growth almost half a percentage point higher to 4.3%.
You will find a press release as well as the full 60-page Nordic Outlook report here.

The World Economic Forum – now open to a larger audience

The yearly economic summit in Davos, Switzerland, usually attended by many of the world's movers and shakers, is instead taking place in digital format this week. As a result, many of the presentations have also been opened up to the general public. You will find the programme here.
In conjunction with the WEF programme, the International Monetary Fund (IMF) unveiled its latest forecasts on January 26. You will find the IMF World Economic Outlook here.

Our market view

During early 2021, expanded lockdowns will noticeably slow economic growth. But vaccine roll-outs and more stimulus measures, especially after the Democratic election victories in US federal elections, will help sustain the economy and markets. We expect the recovery to take off later in the year, creating potential for solid increases in the earnings of listed companies. Along with low interest rates and bond yields, this will provide a bright backdrop for equities.

After last year's upturn, valuations of financial assets are already fairly high from a historical perspective. If growth and corporate earnings forecasts prove correct, while interest rates and bond yields remain low, however, we do not regard valuations as a hindrance. But valuations will limit upside potential and make markets more sensitive to negative news; setbacks cannot be ruled out. Unless conditions deteriorate, any downturns should be limited and should instead be regarded as buying opportunities.