Economic Outlook December 2014

As we enter 2015 we can look back on a differentiated year for Oslo Børs. Investors that avoided oil and oil service exposure can look back on a year with 19 % return. However, those with focus on oil and oil service saw their values fall heavily. The OBOSX (Oslo Børs Oil Service Index) was down 37% in 2014!

Global equity return was decent in 2014. In local currency the US equity market fared best with the S&P500 up 11.4% for the year. Bloomberg European, Nikkei 225 and Oslo Børs followed with a rise of 4.26%, 7.12% and 5.32% respectively. In the currency market it is worth noticing the depreciation of the Norwegian krone of 22.74% to the USD and 8.06% to the EUR. Most of the reason can be explained by a fall in the oil price of almost 50% in 2014. See table below.

 

31.12.2013

28.11.2014

31.12.2014

Return Dec 2014

Return 2014

S&P

1848,36

2067,56

2058,9

-0,42 %

11,39 %

Bloomberg European 500

224,22

236,91

233,78

-1,32 %

4,26 %

Nikkei 225

16291,31

17459,85

17450,77

-0,05 %

7,12 %

Oslo Børs

546,93

566,34

576,04

1,71 %

5,32 %

           

EUR/USD

1,3743

1,2452

1,2098

-2,84 %

-11,97 %

EUR/NOK

8,3436

8,7549

9,0162

2,98 %

8,06 %

USD/NOK

6,0713

7,0304

7,452

6,00 %

22,74 %

           

Olje Brent USD/br

110,8

68,6

57,33

-19,66 %

-48,26 %

Global PMI’s were soft in December. This, however, is neutralized by the sequential growth in the US economy which came in at 5.0% in the third quarter, the strongest reading in 11 years. Momentum is likely to slow somewhat, but the solid growth in private consumption is making up for a likely weakness in business investment. US industrial production was also extremely strong in November, showing the sharpest jump in any month for the past 4 ½ years. Admittedly, there were some one-offs, but there is no denying the solid underlying trend. Going forward market participants will follow the impact lower oil and fuel prices will have on the real economy closely. 

In Europe, the European Central Bank (ECB) president Mario Draghi continues to signal new monetary stimulus programs.  Slow growth in the main economies together with expectations of falling consumer prices after the sharp reduction in oil prices can be the evidence needed for Draghi to convince the Governing Council to favor purchases of sovereign bonds when it meets later this month. Market expectations of low economic growth, falling and/or negative inflation and quantitative easing in Europe have fueled depreciation of the EUR against USD by almost 12% in 2014. A weaker currency is likely to help exporting companies in Europe, and fuel economic growth further down the road.

Chinese macro data for November did not live up to expectations, resulting in increasing market worries that the country’s economic growth will decelerate. However, one partial explanation is that many Chinese companies were shut down in early November for the Asian Pacific Economic Cooperation (APEC) summit in Beijing in order to reduce emissions.

The two weeks leading up to Christmas are likely to go into history as one of the most volatile and turbulent periods for the Russian ruble (RUB) and the local equity market. After the Russian currency hit intraday low of close to USD/RUB 80 on the 16th of December, the market calmed down after the Bank of Russia (CBR) decided to hike the key interest rate by 650 basis points (bps) the same day. The USD/RUB closed the books for 2014 just above 60. It is worth noticing that the USD/RUB entered 2014 at 32.85. The equity fared not much better. The RTS $ Index fell about 43% in 2014.

On December the 11th Norges Bank surprised the market by cutting the key deposit rate 25 bps to 1.25%.  In addition it announced a high probability for another move at the next policy meeting in March. The cut was reasoned with sluggish economic growth in the domestic economy due to spillover from the sharp pullback in the petroleum industry and low oil price. The sharp drop in the oil price has definitely had its effect on the performance of Norwegian oil and oil service related companies in 2014 when they on aggregate underperformed the rest of the market by almost 43%.

Going into 2015 we still believe that the best risk adjusted return will come from the stock market. Our most favored market is Europe where we believe that quantitative easing will help kick start the economies. Norwegian investors, however, should point an eye to the currency risk as the NOK looks weak at the current level.  

By Hans Kristian Hals, Head of Investment Strategy