With the blueprint in hand we can conclude that the first six months of 2014 was a good period for Nordic investors. MSCI Nordic ended up 10.78%. This was well ahead of Europe and North America with 7.50% and 5.39% respectively. The Japanese market had a tougher time, with a decline of almost 6%. The first quarter was characterized with risk off with gold outperforming and commodities underperforming other asset classes. In the second quarter investors were again willing to put on risk and commodities came back strongly with aluminum, copper and oil up 10.6%, 7.2% and 7.2% respectively. Year to date Norwegian equities are up stalling 12.3%. Norwegian high yield bonds have also fared well up 3.6%.
At SEB we see indications of earning revisions bottoming out, which is crucial due to the fact that multiples have risen considerably during the last 2-3 years. Q2 results are due in the coming weeks and investors will follow the numbers very carefully.
On the macro front June was a mixed month. The Investment survey among operators at the Norwegian continental shelf from Statistic Norway was surprisingly weak. The participants expect a drop in investments of 16.2% from 2014 to 2015. It must be added that this is a survey based on already approved projects. Thus the new Johan Sverdrup field which is expected to be approved in the middle of 2015 is not included. Even though we are of the opinion that the numbers are exaggerated, there is nothing taking away the fact that they were weak. The following week, Norges Bank surprised the market by lowering the rate path more than expected and moving the next expected rate hike from next summer to mid-2016. It also added that there is a 30% probability of a rate cut this fall. The NOK came down 2-3% on the news. It fell further after weak retail sales numbers were released 30th of June.
In the US the revised GDP numbers for Q1 showed even weaker growth than first indicated. The final number came in at -2.9% annualized after first showing -1.0%. This is the weakest Q1 number since early 2009, after the financial crises. US durable goods orders came in a bit mixed, but details were better that headlines suggests. Personal spending was also weaker than expected. This is unexpected since the labor market has proved very strong for a long period. This strong trend goes for unemployment, personal income and real disposable income as well. On the positive side, the preliminary PMI came at 57.5 which is a four year high. But with weakness in both durable goods and investment, we will pay extra attention to new indications for the Q2 GDP numbers.
In Europe the PMI eased marginally to 51.8 from 52.2 in May. The French part of the reading fell a little less than expected and came in at 48.2, but proves that France still has a way to go before it is running on normal speed. In Italy the number also contracted somewhat from 53.2 to 52.6, but still holding well above the crucial 50 line. In Spain the news was better and the index came in at 54.0 in June which is a seven-year high. PMI in Germany held up well at 52.0.
Many investors are worried about China. After a soft start of the year, the latest manufacturing figures out of China shows firmer ground. The monthly PMI indicates stronger order intake in manufacturing, with the flash estimate for the PMI index coming in at 50.7 on the 1st of July – which is the highest since November. It is also good news that new orders are leading the way by jumping five points to 51.8, which is a 15-month high.
Last month we were worried about the developments in Ukraine and Iraq. The new president in Ukraine, Poroshenko, announced a peace plan at his first official trip to the Donbas region. It is a positive move and was also welcomed by Russia’s president Putin. However, only a week later he signed an economic and political cooperation agreement with EU. Much to the anger of Putin since it weakens a potential Eurasian trade block with Russia in the center. What will happen next in this political power play is difficult to predict, but the financial markets have taken the latest developments with calm. In Iraq the dissatisfaction with the ruling Shia prime minister Nouri al-Maliki is growing. Since coming to power he has favored the Shia majority of the population at the expense of the Sunni minority. There is an increasing pressure both internationally and domestically for him to step down and elect a more consensus oriented prime minister.
Going forward SEB will follow both macro and micro events closely. If the underlying macro trend is losing momentum it will be hard for the companies to deliver the results needed to justify the higher multiples. We still have a positive view on Europe, and believe that the continent has passed the bottom and that better times lie ahead. In the US the economy is continuing to improve, but the equity market is in expensive territory. In Asia we see signs of improvement and believe the central government in Beijing have the necessary tools to maneuvering the economy toward a GDP growth of 7%.
By Hans Kristian Hals