22.01.2020 11:32

Market Outlook: Short term relief, but long-term risks

The United States and China have signed a trade agreement...

After a trade conflict lasting since summer 2018, including billions of dollars in punitive tariffs and accusations of currency manipulation, the US and China signed a Phase 1 trade agreement on January 15. The agreement was welcomed by stock markets, which have gained about 0,6 per cent this past week (MSCI All Country World Index in US dollars).

The Phase 1 pact represents an important step towards easing trade tensions, but much remains to be done. Despite the agreement, both US punitive tariffs on Chinese goods and Chinese subsidies to state-owned enterprises remain in place. The US-China relationship is many-facetted and complex. We believe it is rather improbable that a Phase 2 agreement will be signed during 2020.

... but the European Union and the United Kingdom may end up in overtime
Global trade remains weak, but as uncertainty about trade policies fades, we expect trade volume to grow by about 2 per cent both in 2020 and 2021. The EU must now avoid trade conflicts with the US and quickly reach a new trade agreement with the British. UK Prime Minister Boris Johnson has admitted there is a risk that the two sides will not succeed in negotiating an agreement before his country leaves the EU in practice on December 31. The strategy will probably be to strike a limited agreement, which the EU and UK can expand on during the next few years.

Short-term relief, but long-term risks
World economic growth is accelerating cautiously. But lingering political uncertainty and supply-side constraints are diminishing the power of the upturn, SEB economists write in the new issue of the quarterly research report Nordic Outlook. Low central bank key interest rates for a lengthy period will provide support, but they also raise questions about long-term risks of debt build-up and spiralling asset prices.
Read the entire February 2020 issue of Nordic Outlook (pdf)

The lowest Chinese growth rate for 29 years
China's gross domestic product (GDP) growth during the fourth quarter of 2019 was 6% year-on-year. This was consistent with expectations, but still at the lower end of the country's 6-6.5% growth target and the lowest growth rate since 1990. Aside from GDP, China published December figures for industrial production, private investments and other variables which confirmed that the economy is nevertheless stabilising.

Mixed stock markets in Asia ahead of Chinese New Year
Asian stock markets tumbled on Tuesday, January 21, after a weak Monday, but regained some ground this morning. The declines were partly due to a downgrade of Hong Kong's credit rating but more attributable to worries about how a lung disease caused by a newly detected corona virus might affect household spending ahead of Chinese New Year, which falls on January 25. During the "Spring Festival" travel season from mid-January to mid-February, Chinese officials expect 3 billion trips to be made as families hold reunions.

Trump's impeachment trial has begun in the US Senate
The Senate trial against President Donald Trump began on January 21. Earlier predictions were that the entire trial would last for two weeks, but the timetable will now depend on whether senators vote to allow new witnesses, and to what extent. Conviction and removal of the president would require a 2/3 majority Senate vote, which is regarded as nearly impossible to achieve and has never happened in the past.

Our market view

If growth holds, stock markets will hold
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.

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.

The fourth quarter corporate report season is now beginning. After the recent strength of the stock market, there is probably room for disappointments, but that risk is limited because forecasts of full-year 2019 earnings have already been lowered significantly. Earnings expectations for 2020 appear too high, however. Since most investors already assume that corporate earnings may end up below analysts' forecasts, and considering the lack of alternatives to equities, the strong start to this stock market year may also last for another while. 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 21-24 − World Economic Forum: The WEF summit in Davos, Switzerland, has about 3,000 participants from 117 countries, including some 50 heads of state or government. This year's theme is "Stakeholders for a Cohesive and Sustainable World". With a focus on sustainability, most of the global risks to be discussed are climate-related – click here to read more on weforum.org.
  • January 23 – Interest rate announcements from the European Central Bank and Norges Bank: both the ECB and the Norwegian central bank are expected to leave their key interest rate unchanged (which is also our forecast for the rest of 2020).