12.08.2020 10:21

Market Outlook: Stock market optimism, despite mixed messages on the pandemic

During the summer, stock markets have continued to climb. The MSCI All Country World Index, measured in US dollars, gained 3% in June and 5% more in July. We have also seen especially strong share price increases for "digital dragons" – mainly US-listed technology companies – which account for a large percentage of all returns in American equity indices. But above all, many second quarter corporate reports showed better earnings than the very low expectations of market analysts.

Measured in Swedish kronor, stock markets have not performed quite as well because the SEK has appreciated during the summer. This means that investments denominated in other currencies have paid lower returns when converted to SEK. After several difficult years, it looks as if the still-undervalued krona may climb further, reaching around SEK 8 per USD by next summer.

Mixed messages on the COVID-19 pandemic

The pandemic has passed yet another depressing milestone, with more than 20 million cases now reported, of which five million in the United States. On August 10, President Donald Trump urged Americans to stop "politicising" the coronavirus, then immediately criticised China for its role in spreading COVID-19. From an economic perspective, there would be adverse effects if countries again shut down many businesses due to a renewed surge in the pandemic this autumn and winter. We thus believe that they will instead mainly impose selective or "smart" lockdowns, while improving contact tracing in order to limit the number of deaths and minimise the effects on economic growth and jobs.

Tensions with China and a provisional US crisis package

Political tensions between the United States and China continue to escalate, including at the corporate level. They look set to become an important theme in Trump's re-election campaign. Earlier this summer, Chinese companies were threatened with delisting from US stock exchanges if Washington is not allowed to scrutinise them more closely. Last week Microsoft was urged to take over portions of TikTok, a video app, and US companies were prohibited from doing business with the Chinese owners of both TikTok and WeChat during a period of 45 days, for national security reasons. This is neither the first nor the last episode in the ongoing conflict about future technology and information security. However, these tensions do not appear to have had much impact so far, since US-Chinese trade unexpectedly climbed in July.

In recent weeks the Democrats in Congress and the Republican-led White House have failed to reach agreement on a new COVID-19 relief package. This resulted in a series of executive orders from President Trump this past weekend, including an extension of federal unemployment benefits under new conditions. But it is questionable whether the president is actually entitled to enact such a provisional crisis package, which makes the US stimulus situation unclear. There are indications that the two sides will still need to agree on new legislation, which will perhaps be on a smaller scale this year than we had anticipated, with further fiscal stimulus being postponed until 2021, after the election.

Swedish unemployment rising more slowly but lasting longer

The Swedish Public Employment Service reported that the jobless rate rose to 9.3% in July. This was a slower rate of increase than earlier, but the number of long-term unemployed meanwhile rose faster. Within a few weeks, a number of publicly financed stimulus programmes related to the coronavirus will expire. Given today's uncertainties, it seems reasonable for the government to unveil new crisis packages, perhaps especially if there is a new wave of lay-off notices. Yet the future also seems somewhat brighter, since total unemployment is expected to peak at around 11% in March, a downward revision from the Employment Service's previous forecasts.

Continued rapid recovery in housing price expectations

According to SEB's Housing Price Indicator, expectations rose in August for the second consecutive month. Based on data from Swedish estate agents, Svensk Mäklarstatistik also reported that in spite of the summer holidays, 27% more tenant-owned housing units were sold in July 2020 than in the same month last year. The Housing Price Indicator has now almost recovered to the level prevailing before last spring's big downturn, and 52% of households now expect rising home prices.

Read more here

Column: Winners and losers when work moves home

What will the future look like for espresso machines, handbags and the gig economy? For many employees, working from home has morphed from something they did occasionally to the new normal. Google recently announced that it plans to let its employees keep working from home until July 2021. If it can run a successful business by working remotely for another year, why not for longer? Our Chief Strategist, Johan Javeus, has examined what changes the major upheaval now under way in the labour market will bring.

Read the entire column here

 

Our market view

Pessimists are seeing economies that have lost their momentum and surging virus outbreaks in many countries. Optimists are seeing strong interim corporate earnings reports and new stimulus packages.

Looking ahead, we expect continued low interest rates and bond yields − as well as a slow return to more normal growth trends − to help sustain stock markets. We thus have a cautiously optimistic view of risk assets such as equities, and we are maintaining our hypothesis that stock market downturns can be regarded as buying opportunities.

Returns on corporate bonds have climbed sharply since last March's price decline and have greatly exceeded our expectations. Their future potential is thus not as strong as before, but we are still positive towards owning corporate bonds, especially those with a sustainable focus.