There are various reasons for the current market weakness. During the past week, investors saw slowing macroeconomic momentum, including weaker than expected purchasing managers’ indices (PMIs). Other factors this month were widespread disappointment that the US Federal Reserve is not doing more, a rising number of new COVID-19 infections, Brexit negotiations (on British withdrawal from the EU) and uncertainty ahead of the approaching US presidential election.
Mixed macroeconomic data
Since last spring, broad PMIs have recovered quickly – in some cases to higher levels than before the coronavirus crisis. In the euro area, the upward trend in PMIs ended during August, mainly reflecting a more sombre mood in the service sector as the number of new COVID-19 cases rose and due to increased uncertainty about new lockdowns and other restrictions. Preliminary PMI figures for September show that both the service sector and manufacturers in the United States expect a favourable economic trend, while the service sector in Europe is expected to continue its slowdown.
In Sweden the Economic Tendency Indicator, published by the National Institute of Economic Research (NIER), rose for the fifth consecutive month in September but remains well below its normal level. All industries except construction contributed to the increase but there were major differences between sectors. The hygiene and health group Essity is among companies that are resuming dividends and have not taken advantage of the government’s wage subsidy scheme, while the CEO of Tallink Silja announced that the Baltic Sea cruise ferry company needs to know as soon as possible whether the scheme will be extended. Some sectors and companies have hardly utilised government crisis relief programmes while others continue to need them. This situation will not make it easy for the nationwide wage and salary negotiations between labour unions and employers organisations which begin this week.
Round one, Trump vs Biden
Last night the first of three debates between the two main US presidential candidates took place. The Democratic campaign is trying to support Joe Biden by attacking President Donald Trump for paying little or no federal income tax, while the Republican campaign has targeted Biden’s health. The debate was messy, with repeated interruptions and both candidates talking over each other. Biden, speaking most of the time to the camera, rejected accusations of being controlled by radical leftist Democrats and Trump continued to question the integrity of mail-in votes. Political analysts disagree on who won but concur that the debate was unusually chaotic, with even the moderator being repeatedly interrupted. However, it is unlikely that the debate will change the playing field ahead of the November election in any decisive way.
Voter views on the two candidates are deeply polarised. Although public opinion polls show that Biden remains ahead of Trump, the gap between them appears to be narrowing.
To help companies, House Speaker Nancy Pelosi announced Democratic plans to present a new fiscal stimulus bill aimed at striking a compromise with the White House. But Trump’s statements that the US presidential election will probably end up being decided by the Supreme Court do not indicate any strong Republican willingness to reach a compromise.
Temporary pause in the trend towards a weaker US dollar
During the past week, worries about the November 3 elections have contributed to an upturn in the US dollar – a currency to which many investors flee when they see foresee market volatility. The Swedish krona, which is usually among the losers in such an environment, has consequently fallen. On the other hand, this shift has temporarily helped Swedish investors that own securities with prices quoted in USD (since each invested dollar is worth more when converted to kronor). Yet our exchange rate forecast is that the krona will strengthen to SEK 8.70 per USD by year-end from today’s level of about SEK 9 per USD.
Round nine, European Union vs United Kingdom
The tone seems to have improved somewhat ahead of the ninth round of EU-UK trade negotiations, which many observers regard as crucial to achieving an agreement by the end of the Brexit transition period on December 31. Later this week, EU leaders will assess the outcome of the talks. The EU’s chief negotiator has said that late October or early November is the absolute final deadline, but as usual it is difficult to determine when negotiations have actually crossed that line. Although the probability of a no-deal British exit from the EU has risen, the enormous costs this might entail are the main argument why the two sides will in fact probably achieve an agreement in the end.
Our market view
There is no shortage of reasonable causes for the stock market volatility of recent weeks: worries about the effects of new coronavirus outbreaks, a levelling off in economic growth statistics and concerns about the US elections and Brexit negotiations. The result has been share price corrections, especially for the major “digital dragons” such as Facebook, Amazon and Google, which had led the summer’s rally.
But there are also positive market drivers – the world economy is in the midst of recovery, governments and central banks are providing stimulus measures and are prepared to do more, while interest rates and bond yields will set to remain record-low for some time. We expect new COVID-19 outbreaks to be met with “smart” lockdowns and believe that the global digitisation trend will continue, which in itself will enable digital technology companies to keep generating good growth and solid earnings.
Although the stock market can hardly climb as quickly as this past summer, and although their valuations are considerably higher than the market average, we foresee continued good growth for digital companies and thus regard the latest downturn in their share prices as a temporary correction. Given the surge in stock market indices over the past six months, our bright outlook is already largely priced in. This makes 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.
Looking ahead, we expect a more normal stock market pattern after the vigorous recovery, but we are sticking to our recommendation of an overweight in equities and other risk assets such as corporate bonds in the high yield segment.