US elections - awaiting the final outcome
Things are going better than expected for Trump, but the final outcome will take time. Vote counting is in full swing. The election has not been decided, but it is clear that expectations of a landslide victory and a so-called "blue sweep" for Joe Biden and the Democrats have not been met. As the situation looks right now, Trump is leading in several important swing states. This means that the record number of postal votes and potential legal battles may play a decisive role. A final result may take anywhere from days to weeks. In addition, it looks like the total turnout will be record high, perhaps the highest in 100 years for a presidential election. The Democrats are expected to retain a majority in the House of Representatives, but to take control of both chambers, Democrats need to win 3-4 Senate seats. It is still unclear whether this will happen. Asian markets this morning interpret the situation with "risk on" and rising share prices, while the US dollar has appreciated and US Treasury yields have fallen.
Strong report period and macroeconomic data pushed into the background
The ongoing third quarter corporate report period continues to show impressive results, and much of the recently published macroeconomic data has been in line with expectations or better. But all of this has been pushed into the background, since investors are largely focusing their attention on the elections in the United States and the alarming recent expansion of COVID-19.
Alarming expansion of the COVID-19 pandemic
COVID-19 continues to trigger alarms, and a number of countries have unfortunately set new records recently for the number of reported cases. The increased spread of the virus and worries about new pandemic-related restrictions have continued to dominate the world's stock markets. Last week France and Germany introduced far-reaching new restrictions, although they are not quite as extensive as last spring. In France, schools and most workplaces will remain open, but bars, non-essential shops and restaurants are being closed, domestic travel is being curtailed and large gatherings are being prohibited. Germany is introducing similar restrictions and is permitting residents to spend time outdoors only with members of their own household plus one other person. Other European countries that have introduced new restrictions include the United Kingdom, Austria, Portugal and Greece. Such restrictions are not popular with everyone; in Spain, for example, there have been violent protests against new lockdowns.
After last week's virtual summit, European Union leaders urged member countries to keep their borders open to fellow EU member nations but at the same time discouraged non-essential travel within Europe. The outlook for international tourism during the winter is thus looking dark.
Unclear results for vaccine candidate
Pharmaceutical giant Pfizer, which is conducting large late-stage trials to develop a COVID-19 vaccine, indicated last week that it has not yet been able to determine how well the new drug protects people against the virus.
The ECB promises new action in December
The European Central Bank left its monetary policy unchanged last week but more or less promised new stimulative measures after it publishes new forecasts in December. According to ECB President Christine Lagarde, the Governing Council will "recalibrate its instruments". Working groups at the ECB are now studying what actions will then be the most appropriate.
Manufacturing is showing resilience
So far, indicators suggest that the manufacturing sector has shown resilience to the new pandemic-related restrictions, but a downturn in consumer confidence is signalling that the increased spread of COVID-19 and the absence of new stimulus measures have begun to affect household sentiment.
The Chinese economy is holding up nicely
Chinese purchasing managers' indices (PMIs) for October are showing continued expansion for both manufacturing and service-producing companies. The recovery is impressive, and the V-shaped scenario is alive and well. Statistics confirm that businesses in China are both willing and able to produce and that consumers are willing and able to consume – despite international instability. The country's new five-year plan also confirms, though not yet in figures, that Beijing is increasing its focus on the domestic economy as a growth driver.
Improved Swedish outlook, but cost-cutting remains an alternative
SEB's twice-yearly survey of Swedish corporate chief financial officers, which was published last week, shows a clear turnaround in the financial outlook for companies. The upturn is strongest in the sectors that were initially hardest hit by the COVID-19 crisis – manufacturing and business and professional services – and the turnaround in Sweden is substantially more robust than in the rest of the EU. Companies continue to prioritise cost reductions but their focus on organic growth has increased. Questions about employee numbers nevertheless indicate further cutbacks. The investment climate is viewed as challenging, but existing capital spending plans are described to a greater extent as domestic.
Our market view
Worries about the increased spread of COVID-19 and uncertainty about the US elections pulled down share prices last week.
Despite increased uncertainty regarding the outcome of yesterday's US elections, their impact on the stock market need not be so large. This time around, many analysts are pointing out that both main US presidential candidates plan to pursue an expansionary economic policy. This should help sustain growth and share prices, regardless of who wins. However, the policy mix advocated by their respective political parties diverges in a number of fields. Whereas Donald Trump and the Republicans are favoured by the market in terms of taxation policy, a victory by Joe Biden and the Democrats is likely to pave the way for larger fiscal stimulus packages.
Although the US presidential race may trigger short-term volatility – especially if the outcome is unclear and/or disputed − we expect growth, stimulus packages and continued low interest rates and bond yields to be more important in determining stock market performance in the next few quarters, and these factors remain relatively encouraging.
Equity valuations are high from a historical perspective, making the market more sensitive to negative news. But there are good arguments for accepting higher valuations, especially low interest rates and yields along with major stimulus packages, which suggest continued good growth.
Most companies have now reported their third quarter 2020 results. The general picture is that earnings have provided upside surprises. Yet strong quarterly reports have not been fully rewarded with rising share prices, a confirmation of our view that the upturn since stock markets bottomed out last spring implies that investors are already counting on positive performance ahead, as reflected by valuations. Yet because of better-than-expected earnings, combined with flat or slightly negative share price movements, valuations have recently fallen a bit. We do not regard today's valuation levels as alarmingly high, although they imply some limitations on potential returns.
Worrisome signals about the spread of COVID-19 and the risk of new lockdowns are probably the biggest threat at present. Because of the restrictions that have already been imposed, growth forecasts for this winter – which have been adjusted upward in recent months – may need to be lowered for the current quarter. As long as the spread of the virus is accelerating, new lockdowns will be a major source of concern. On the other hand, we are probably approaching the date when COVID-19 vaccines can be launched. This is likely to calm financial markets, but at this writing the risks are more concerning.
Yet given the encouraging overall economic outlook we are sticking to our recommendation of an overweight in equities and other risk assets, despite short-term sources of concern.