After a very strong Q1 European equity markets took a pause in April. Bloomberg European was down 0.84% for the month. S&P 500 and Nikkei fared better rising 1.95% and 1.69% respectively. Oslo Børs had a strong month and climbed 3.26%. Thus far in 2015, the macro data out of the US has been on the weak side. In April, foreign exchange markets reflected over this, and traded the green buck down 4.4% to the euro. The USD also lost 5.70% of its value to the NOK. Oil prices climbed and ended the month at $66.8, up more than 21%.
The US economy chilled down in the first quarter. After the weak industrial production figures, the market expected weak GDP growth for the first quarter. However, 0.2% on an annualized basis was well below consensus forecast. The slowing was broad based, but the weakness in private consumption surprised us the most. The growth rate fell from 4.4% to 1.9%. This on the back of a healthy growth in households’ real disposable income. Bad weather and port strikes at the West coast can explain part of the weakness. In addition, large corporations have commented that they are hurting under the strong USD. However, equity investors were not particularly concerned. In fact from their point of view it is considered positive that the US economy has taken a break because, then it is more likely that the Fed will postpone its first rate hike. SEB still expect the first hike to come at the Feds September meeting.
While macro numbers out of the US has been weak, the opposite is happening in Europe. We have stressed that it is worth following the ECB’s bank lending survey. The results have been on an upward trend for some time now, and it indicates that banks are easing the credit standards to households and non-financial corporations. This, in combination with higher demand for loans and fresh consumer confidence figures showing the highest reading since 2007 are indicating that more growth is in the pipeline for the Eurozone going forward. It is worth mentioning that there is not yet an agreement between the troika (European Commission, IMF and ECB) and Greece yet. There are clear evidence that the Syriza-led government in Athens are taking action and among other things giving its hardliner Finance minister, Yanis Varoufakis, a less central role in the negotiations with the troika. About 80% of Greeks prefer continued membership and so do the government.
The Chinese authorities has reduced growth target to 7% for the next years as the economy has transformed from being production oriented towards being more service oriented. However, with the numbers coming out, we do see a downside risk to the target. Evidently, the People’s Bank of China (PBoC) also see risk of lower growth and on April 19th cut banks’ reserve requirements. If macro numbers continue to be weak, investors can expect more stimulative policies in form of rate cuts, cut in reserve requirements and infrastructure projects. In USD terms, the Russian stock market has been among the top performers thus far in 2015. The USD/RUB has come down from its peak around 70 early in the year to just over 50 by the end of April. The credit spread for Russian governments bonds has also fallen dramatically from around 700 bps to less than 350 in hard currency terms (USD). This is far more than can be explained by the upswing in the oil price and one can suspect that the market foresee a lightening of the sanctions imposed by the West on Russia. The Russian Central Bank also seem more confident and cut the interest rate by 150 basis points to 12.5% the last day of April.
Even though S&P 500 had a strong month, from a Norwegian investors perspective the return were weak as positive development of the equity market far from compensated for the negative return because of the appreciation of the NOK against the USD. Going forward, we continue to warn investors about currency risk. We still overweight Europe, as we expect positive macro surprises going forward. In our opinion, the macro weakness we saw in the first quarter in the US is of temporary art, and we expect growth to pick-up in the second and third quarter. In China, we are worried about the bobbly tendencies in the local equity market. Forces against this are the expectation of more stimuli from the Chinese authorities. As we enter May, we expect short-term volatility as equity indices have had a very strong run so far this year, and are likely to take a pause. Despite of this equities are still our preferred asset class for the next 12 months.
By Hans Kristian Hals, Head of Investment Strategy