26.08.2020 09:25

Market Outlook: Virus optimism lifts equities

Global share prices, as measured by the MSCI All Country World Index in US dollars, have continued upward. Meanwhile in the United States, the S&P 500 index again climbed to new all-time highs and has thus gained more than 55 per cent since stock markets bottomed out in March. Several companies have released promising news about future COVID-19 vaccines, and the US has resumed trade talks with China. Hurricanes heading for the US contributed to the oil price rising to its highest level in about 5 months (Brent at USD 46/barrel).

Virus optimism

The cheerful stock market mood was driven in part by optimism about the battle against the novel coronavirus. Both German Chancellor Angela Merkel and French President Emmanuel Macron spoke out against new nationwide lockdowns, despite the increased spread of the disease. The two leaders called for Europe to better coordinate its strategy in order to avoid further economic damage.

The number of new COVID-19 cases in the US last weekend was the lowest in over two months. Meanwhile President Donald Trump spoke about positive results from plasma injections, but the Food and Drug Administration (FDA) has expressed scepticism.

US-Chinese trade talks have resumed

US Trade Representative Robert Lighthizer and China's Vice Premier Liu He spoke by telephone on August 24 about the Phase 1 trade agreement signed last January. According to the American press release, their conclusion was that "Both sides see progress and are committed to taking the steps necessary to ensure the success of the agreement." According to the Chinese, they have taken steps to offer greater protection of intellectual property rights and remove impediments for US companies in financial services and agriculture. Other topics in the discussions were China's progress in buying American goods and what actions will be needed to implement the agreement.

In the US presidential election campaign, however, tough language on US-Chinese relations seems likely to predominate. Trump has said that he would not hesitate to cut all ties with China if that country does not treat the US properly and that "China will own our country" if Joe Biden, his Democratic opponent, wins the November election.
We believe that whichever candidate is victorious, the US president will continue trade discussions with China, although less drama can be expected if Biden – currently favoured in voter surveys – is the winner. Other policy changes under a President Biden will be green investments and tax hikes for high income earners. However, uncertainty about the election this time around is connected not only to the candidates but also the voting process itself. If a large percentage of votes are sent by mail, it may take weeks before the results are final. Coronavirus developments, the pace of economic recovery and the outlook for a COVID-19 vaccine are three of the factors that may determine the election outcome.

Read more about Biden's election promises and SEB's thoughts ahead of the US elections on pages 25-27 of the latest Nordic Outlook (see below).

Trump takes the stage as his re-election campaign gears up

The Republican National Convention began on Monday with the official nomination of Donald Trump as president and Mike Pence as vice president. Trump's campaign website was updated over the weekend with a number of points that the president will elaborate on in his acceptance speech on Thursday and in the coming weeks, under the slogan "Fighting for you". His agenda includes promises of tax cuts, "fair" trade agreements, deregulation in the energy sector, lower prescription drug prices and freer school choices. As for COVID-19, Trump promises a vaccine by the end of 2020 and a return to "normal" next year, while calling for China to be held "fully accountable" for the global spread of the virus. You can read Trump's campaign programme here.

New Nordic Outlook: Effective crisis responses with long-term risks

The September issue of SEB's information-packed quarterly macroeconomic research report, Nordic Outlook, was published on August 25. After a tough spring, SEB's forecasts offer some bright spots. We have revised our outlook for the advanced economies upward after a faster recovery than expected, despite more extensive virus spread than anticipated in the May issue. But worse COVID-19 prospects in emerging market (EM) countries are weighing down global GDP.

In Sweden, GDP will decline by only 3.8% this year and climb by more than 4% in 2021. This autumn's government budget is expected to include new stimulus measures worth SEK 100 billion during 2021. Meanwhile unemployment will peak at above 10% and inflation will remain below the Riksbank's 2% target. We believe that unemployment will climb gradually during the coming months but will be lower than in many other parts of the European Union. This suggests continued Swedish krona appreciation. If further stimulus is needed, the Riksbank prefers expanded asset purchases instead of going back to negative key interest rates.
Read the entire report (60 pages)

Our market view

The stock market upturn of recent months has largely been driven by "digital dragons": mainly US-listed technology companies. Their share of overall market capitalisation has increased − which in itself poses a risk − and their valuations have climbed to historically high levels, but these companies are also showing large profits and very rapid earnings growth, not least due to the current worldwide digitisation megatrend. This suggests that today's valuations are defensible.
For the market as a whole, there are also other risks besides high valuations. New virus outbreaks will increase the risk of new lockdowns. These will probably be on a smaller scale than last spring, but if there are many of them they can still have an impact on growth. Geopolitical uncertainty is another negative factor, especially US-Chinese tensions and the US elections, as well as Brexit (British withdrawal from the European Union) and difficulties in EU cooperation. On the positive side is the relative strength of second quarter corporate earnings reports, which surpassed low expectations, as well as the powerful stimulus measures that governments and central banks have launched and the outlook for a COVID-19 vaccine and/or 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.