Economic Outlook April 2016

The third month in a row with positive equity return

April was the third month in a row with positive equity return. The S & P 500 gained 0.30 per cent, while Bloomberg European managed a gain of 1.70 per cent. Japans Nikkei 225 fell 1.35 per cent. Oslo Stock Exchange climbed close to 5 per cent, helped by a rise in the oil price of more than 20 per cent. This climb also led to an appreciation of the Norwegian krone against most major currencies. So far in 2016, the Norwegian krone has appreciated close to 10 per cent against the US dollar and four per cent against the euro. The US dollar depreciated further against the euro last month, and closed at 1.14.

In her speech in the beginning of April, Federal Reserve Chairwoman, Janet Yellen, was more dovish than expected. She said that the US economy is running on good speed, with strong labor market and healthy demand. However, she also expressed concern about global growth and the Chinese economy in particular. Investor’s interpreted the Chairwoman’s speech as more dovish than earlier statements and markets speculated that the interest rate path will be less aggressive than previously thought. This reaction has also led to a depreciation of the US dollar. SEBs GLEI (global leading economic indicator) predicts that economic conditions will improve for the rest of 2016. Our findings are also supported by OECDs leading indicator for April.

From a Norwegian perspective, the surge in the oil price is very good news. Prices rose in excess of 20 per cent in April as investor’s start to believe in market balance in the oil market towards the end of 2016. The reason for this change in confidence are that exploration and development in new fields have fallen sharply for the last two years, US shale production is falling, and demand for oil has held up.

The reporting season for the first quarter started relatively weak, however, numbers have picked up. Revenues are on the weak side, but EBIT (earnings before interest and tax) have been stronger. In the Nordic region 37 per cent of companies have reported EBIT ahead of our expectations so far. 22 per cent have disappointed. Particularly in Norway, clean EBIT is close to 12 per cent higher than SEB’s expectations.

On aggregate risk level we remain neutral, and still foresee volatile markets. In the medium term one key risk is that the market is too optimistic about the future interest rate path of the Federal Reserve. Another risk is that global economic growth disappoints. Both these events could trigger short market turbulence. Looking ahead, if the oil market balances towards the end of the year, Norwegian investors should direct their attention towards domestic equities. One element is that higher oil prices eventually will lead to higher spending and income in the oil sector; another is the potential appreciation of the Norwegian kroner. 

By Hans Kristian Hals, Head of Investment Strategy