Weak economic statistics vs high hopes
In the United States, the Institute for Supply Management (ISM) purchasing managers' index (PMI) for manufacturing is now at its weakest since the series began in the 1940s. Corresponding indices in most countries are pointing to shrinking economies, but China's PMI has now rebounded and is close to the threshold signifying economic expansion. The country's recovery is confirmed by daily indicators such as coal consumption, traffic and air pollution, but levels are still below those of the same period last year. In the US, first quarter gross domestic product (GDP) was down by an annualised 4.8%, which was more than expected. The number of initial US unemployment benefit claims last week was about 3.8 million. According to our forecasts, this may mean that American unemployment (which will be reported this coming Friday) has increased to a total of about 15%. One bright spot amid the gloomy statistics is perhaps that the week-by-week pace of new jobless claims has fallen over the past five weeks.
Tighter credit conditions trigger corporate bond purchases
Studies by the US Federal Reserve show that banks tightened their credit conditions sharply during the first quarter. In response, the Fed is now preparing to buy corporate bonds − a step that it announced in late March. These stimulative purchases will make it easier for businesses to become self-financing and will include both direct bond-buying and purchases via listed index funds.
Crisis responses: US moving towards record-sized federal borrowing
The US federal government plans to borrow about USD 3 trillion (14% of GDP) during the second quarter in order to fund its stimulus packages. By way of comparison, borrowing in the entire previous fiscal year was USD 1.3 trillion. Congress is also discussing yet another stimulus package, which may push borrowing even higher.
New Nordic Outlook report
Today (May 6) SEB Research is publishing its latest quarterly Nordic Outlook report, with the heading "Unprecedented halt, despite record stimulus". The issue contains in-depth analyses of the world situation, including COVID-19, economic policy responses and their impact. You can read it by clicking here.
Corporate earnings down in 2020, up again in 2021
The corporate report season is of course substantially worse than last year, but our equity strategist specialising in Nordic equities, Stefan Cederberg, still regards it as somewhat better than feared. The main impact of the coronavirus pandemic will not be visible until corporate reports for Q2, which will be published this summer. There is enormous uncertainty about both the supply and demand sides of the economy. For many companies, 2020 may turn out to be a lost year, but bright spots include pharmaceuticals, convenience goods and both goods and services for the home. Overall, market forecasts of earnings indicate a sharp decline in 2020 but projections for 2021 are meanwhile being revised upward. The post-lockdown recovery will probably be more prolonged than the downturn, since stimulus funds must also eventually be paid back.
Q1 reports by Nordic manufacturers have been better than expected, but for telecom operators they have been worse because of lower advertising revenues and roaming fees. Convenience goods shares have performed robustly, partly due to hoarding early in the pandemic, but mainly because more people are eating at home and the transition to e-commerce has also accelerated. Stefan suggests buying companies with cyclical exposure that have not been revalued upward yet; the scenario is that the worst is behind us.
Our market view
Stock markets have recently been largely flat. Weak incoming economic data are offsetting hopes of a return to more open, functioning economies – supported by aggressive stimulus measures from central banks, governments and others. Mixed reports about the spread of the novel coronavirus and the pace of reopening after lockdowns are contributing to continued stock market volatility. There are still large fluctuations, although they are more manageable than at the beginning of the COVID-19 crisis.
The return to a more normal situation will probably drive the coming recovery. This undoubtedly justifies a rebound in share prices from their sharp declines during March. But the scale of this rebound is a source of concern.
Because of the economic slowdown, corporate earnings forecasts for 2020 will be revised sharply lower. Most observers, including us, expect earnings to regain a lot of lost ground during 2021 and probably also set the stage for earnings to continue increasing after next year. But already driving up share prices towards their earlier peaks is challenging, given the prevailing uncertainties and the sizeable dips in earnings curves we are now seeing.
Decent growth prospects on the other side of the crisis, along with continued low interest rates, are laying a good long-term foundation for equities. The credit market has stabilised, which will generate potential for corporate bonds. An optimistic view today focuses on the brighter long-term outlook and maintains that today's historically stretched share price valuations are justified by continued low interest rates and bond yields. We share this view of long-term fundamentals and see reasons for slightly higher valuations, but in the short run there are still many risks of disappointments, since the rapid upturn makes the market more sensitive to the negative news about economic growth and corporate earnings that can reasonably be expected to pop up on the radar during the coming months.
Please contact your private banker if you have any questions or concerns.