January was brutal to many investors. Most markets declined sharply due to falling risk appetite. All of a sudden the uncertainty factors were too many for the market to handle. Among them were continued fall in oil and commodity prices, less consumer spending than expected (though still relatively strong), lowered estimates on economic growth and corporate earnings, and the weakness in the credit market. The main markets were all down between five per cent and eight per cent for the month. Oslo Stock Exchange fell 8.10 per cent. Even though the oil price fell almost 10 per cent in January, the Norwegian currency managed to appreciate against both the euro and the US dollar.
Oil prices continued its sharp fall, and the front contract ending in March traded intraday as low as $ 27.20 in January. The market is well aware of the current oversupply of oil, but during January market participants also started to worry about the demand side as macro figures came in on the weak side of expectations. In addition, sanctions against Iran were lifted as expected after inspectors from the International Atomic Energy Agency (IAEA) announced that the country had dismantled major elements of its nuclear program. The oil price rebounded quite sharply in the latter half of the month after a series of hopes and rumors.
Central banks did their best to support the market. First out were ECB as Mario Draghi more or less promised more monetary stimuli in March. He was followed by Bank of Japan who unexpectedly, and for the first time cut the interest rate into negative territory. Lastly the US Federal Reserve signaled that it is well aware of the ongoing turbulence and thus reduced expectations of an interest rate hike in March. However, the bank also stated that the US economy is stable, supported by a very strong labor market. SEB believes that the next hike will be in September.
We still believe that global economic growth will pick up in 2016, though at a low pace. We continue to have a long term positive outlook for equities. However, investors must be prepared for more volatility than we have been used to for the past years. Economic growth and corporate earnings will be crucial in 2016 and 2017. We favor European equities. As we believe in a pick-up in the oil price in the second half of the year, we see a potential upside in the Norwegian market if we move our sight a little further ahead. For the last one and a half year, investors with international exposure have had a relatively strong currency gain. Part of this gain will be at risk if the oil price recovers as we expect.
By Hans Kristian Hals, Head of Investment Strategy