February was a strong month for most equity markets. The best market was Europe where Bloomberg 500 was up 6.6%, closely followed by Nikkei 225 in Japan and S&P 500 in the US rising 6.36% and 5.49% respectively. Oslo Børs (OESBX) gained 3.27% in February. In our Nordic universe, dividend plays and growth sectors were in favor for the last months of 2014. Thus far in 2015, cyclical plays have fared best. The sector rotation has gained support over the past months from the QE from the ECB, and better than expected economic data from the Euro-zone. We also see evidence of the same tendency in the US. After several months with a lot of turbulence in the currency markets, last month was less volatile. The euro lost about 0.85% to the green buck, while NOK regained some territory to the euro, appreciating 1.65%. Most of the tail wind was due to the sharp rise in the oil price. The Brent spot ended the month just over $62/bbl after being $53 in the beginning of February. Still the NOK has depreciated almost 5% to the euro in 2015.
SEB is out with our latest Investment Outlook this week. Even though some indicators have been somewhat soft lately, SEB estimate that the American economy will grow 3.50% this year and 3.2% in 2016. Still, consumer inflation is expected to fall due to the sharp fall in oil prices, stronger dollar and continued spare capacity in the economy. We predict that the Federal Reserve will make its first rate hike in this cycle in September. US Q4 corporate earnings came in with a slight negative tilt. Since the beginning of 2015, consensus forecast for S&P 500 net earnings have been cut by 5%, led by energy.
While the economic surprise in the US has turned down since the beginning of the year, the opposite is taking place in Europe where the index has continued its rise since last autumn. This positive momentum is helped by ECBs QE-program where the central back is to buy government and investment grade bonds in the magnitude of EUR 60bn per month. The policy will fuel the market with liquidity and push bond yields downwards. Government bonds issued by Germany with duration of up to seven years actually have negative rates. SEBs view is that stronger economic growth, and increased inflation expectations will lead to gradually rising government bond yields going forward.
After several weeks with a tug of war, the Greek government on Monday 23rd of February delivered a letter to the EU-Commission and the IMF with proposals of reforms and budget cuts. The contents were approved, but the head of IMF, Legrade, commented that the reform plans were not particularly specific. However, financial markets cheered.
After six months with more or less continued fall in oil prices, oil producers felt relief in February when the price of oil rose sharply. The Brent spot rose to $62/bbl in February, more than a 17% gain from the previous month. As the global economic growth gets a firmer foothold, in combination with a more balanced oil supply, we expect the oil price to stabilize around $70/bbl by the end of the year.
When looking at stock market valuation in isolation, it is difficult to argue that equities are particularly attractive. However, considering the extremely low interest rate level, depressed bond yields, strong economic growth in the US, support from the ECB, the Bank of Japan, and the People’s Bank of China, the picture changes. As for now equities is our most favored asset class. We prefer developed markets to emerging markets, and Europe over the US in local currency. But investors must take currency risk into account. The US will be the first major economy to hike rates. This will push the US dollar upwards. In a more volatile market, as we foresee for 2015, the dollar is likely to be a safe haven during turbulences. In the emerging world our top pick is Asia.
By Hans Kristian Hals, Head of Investment Strategy