08.01.2020 13:01

Market Outlook: Fundamental optimism likely stronger than escalating US-Iran crisis

An expert's three best stock market ideas for 2020

Despite downward revisions in corporate earnings forecasts, stock markets were extremely strong in 2019. Measured by the MSCI All Country World Index in US dollars, global stock markets gained about 25% last year, while Stockholm's OMXS30 index rose by 31% (in Swedish kronor, both were around 30%). Major themes in 2019 included decelerating world economic growth, record-low interest rates and bond yields, Brexit (British withdrawal from the European Union) and the US-Chinese trade dispute. As for the last theme, Phase 1 of a bilateral trade agreement is set to be signed on January 15.

On the whole, 2019 was a fantastic stock market year. The potential is more limited in 2020, with investors prepared for setbacks. Our investment strategist Johan Hagbarth's three best stock market ideas for 2020: impact investments, companies that take advantage of digitisation and low-valued cyclical companies (if growth lasts).

Shaky start to the year due to US-Iran crisis, but little stock market impact

During our winter holiday break, various events increased geopolitical risks. The United States launched a drone that killed Iran's second most powerful leader, Major General Qassim Suleimani, and several high-ranking Iraqi military officers on Iraqi soil. On Sunday, Iraq's parliament thus approved a resolution calling for American troops to withdraw from the country. The Iraqi foreign ministry has also written to the United Nations Security Council, asking the UN to condemn the US drone strike.

Meanwhile Iran is calling US President Donald Trump a "terrorist in a suit" and has sworn to exact revenge against American military targets. The country also announced that it will no longer limit its uranium enrichment. Iran is thus abandoning the 2015 multilateral nuclear deal, which Trump announced in 2018 that the US was leaving.

The immediate impact of these events on financial markets was relatively limited, however. After a moderate initial downturn in share prices, American stock markets rebounded early this week. The All Country World Index in USD is up about 0.2 per cent so far during 2020. Brent crude oil prices, which peaked at more than USD 70/barrel after the drone strike, are back at around USD 69. At present, it thus appears that geopolitical worries may give way to fundamental optimism.

Overnight, Iran has fired ballistic missiles against US bases in Iraq, while stating that it does not want a war. The response so far has been muted and Donald Trump is expected to issue a statement around noon CET today (January 8).

The Riksbank has raised its key interest rate to zero

Riksbank hiked its repo rate from -0.25% to 0% at its December 19 policy meeting. SEB's forecast is that the Swedish key interest rate will remain at zero until the end of 2020. We also expect the Norwegian and British central banks (Norges Bank and the Bank of England) to leave their key rates unchanged this year, while the European Central Bank and the US Federal Reserve (Fed) are each expected to deliver one rate cut this spring.

Mixed economic signals

In the euro area, sentiment rose among purchasing managers in the service sector to 52.8. This was welcome news to economic optimists (an index figure above 50 indicates expectations of economic expansion). In the United States, however, the ISM purchasing managers' index for manufacturing fell unexpectedly to 47.2. We assume that US economic signals will remain a focus of attention in early 2020 and will also be important factors behind market expectations about how the Fed will act.

 

Our market view

 

The power of the stock market rally late in 2019 created a positive momentum that may very well persist for another while. Continued extremely low interest rates and bond yields led to the acronym TINA (There Is No Alternative), which is considered to be one driver behind the rally. A closely related acronym is FOMO (Fear of Missing Out) – few investors want to be left standing on the station platform with low-yielding bonds in their portfolios as the stock market train roars past.

Towards year-end there were also positive signs from the economic and political scene: a stabilisation in macroeconomic statistics, progress towards a phase 1 agreement in the US-Chinese trade dispute and greater clarity on the Brexit issue. Provided that these developments persist, which is our main scenario at the moment, there are many indications that stock markets may continue upward for another while.

But there is no shortage of threats to this positive scenario. Today's stock market valuations are high in a historical perspective. Meanwhile the subdued economic growth outlook suggests that corporate earnings will show only modest increases and that they risk coming in below the (perhaps overblown) expectations of market analysts. This will become especially clear if the macroeconomic stabilisation that we foresee does not materialise, as the latest weak ISM manufacturing figure from the United States indicates, making it necessary to lower earnings forecasts further.

Since most investors already assume that corporate earnings may end up below analysts' forecasts, and considering the lack of alternatives to equities, this stock market year may also begin on an optimistic note. Economic developments will then determine the stock market mood during 2020, probably seasoned with political surprises that can move the markets, especially in the short term. We anticipate plenty of fluctuations and drama, and we expect returns to be well below those of 2019, though slightly positive.

This week's agenda

  • January 7 – ISM purchasing managers' index for non-manufacturing in the US (December): The non-manufacturing index peaked at 59.7 in February 2019 but fell to 52.6 in September. Since then it has been higher, and the December reading of 55 "corresponds to a 2.2% increase in real gross domestic product (GDP)" on an annualised basis, according to the Institute for Supply Management (ISM).
  • January 10 – American labour market data (December): US job growth accelerated during the second half of 2019 and is expected to have remained robust in December, with continued low unemployment of around 3.5%.

Please contact your private banker if you have any questions or concerns.