Global equity markets were mixed in March. S&P 500 ended the month in red by falling 1.75%. Europe and Japan fared better with the Bloomberg European 500 and Nikkei 225 increasing 1.34% and 2.18% respectively. Oslo Børs had a soft climb of 1%. All numbers in local currency. In the currency market, the USD continued its appreciation against the EUR where the EUR/USD ended 2014 at 1.2098. By the end of March the EUR/USD was 1.0731. The USD has also climbed strongly towards NOK. 31.12.14 the USD/NOK was 7.452. By the end of March you had to pay NOK 8.0608 for the USD. Hence, a Norwegian investor with US dollar exposure has had a return of close to 8.20%, only on the currency, in the first quarter! After a strong rally in February the oil price fell more than 11% during the month.
Macro data from the US have tended to surprise on the downside in 2015. Markets participants’ focus has been on when the first rate hike from US Federal Reserve will come. In a much-anticipated speech, Janet Yellen (Chairwomen of Federal Reserve) stated clearly that the first hike in the central bank’s key rate since 2006 will take place this year, but that subsequent hikes will not occur at a predetermined and uniform pace. SEB forecast that the first rate hike will come in September this year.
While US data has been somewhat weak, European data has been strong. Business data from both Eurozone and the UK is very strong. In the Euro Zone consumer confidence is the highest since 2007 and together with stronger employment numbers, it points towards faster GDP growth ahead. The trend we have mentioned before of increased demand for loan from households and non-financial corporations seems to continue. This in combination with the fact that European banks are in better shape, and thus more willing to lend, makes the Euro Zone investment and GDP growth in the coming months look brighter. While the Fed is planning its first rate hike, the European Central Bank (ECB) began its expanded bond-buying programme on March 9. The ECB plans to purchase EUR 60 bn in securities per month until September 2016. Norges Bank surprised markets by not cutting its key interest rate, with the reasoning being the undesirably heated housing market and the fact that the decline in oil price has not yet slowed economic growth much. However, its lower interest rate forecast points to a rate cut during the second quarter of 2015.
The economic growth rate in China has shifted down in recent years as a new economic policy strategy of shifting from capital spending and exports over to private consumption. In the beginning of March, Prime Minister Li Kequiang unveiled China’s new growth target of 7.0%, down from 7.5%. China has made it clear, however, that it has both the capacity and the willingness for further stimulus if the economic growth disappoints.
After lengthy negotiations in Lausanne, Switzerland, the US, the UK, Russia, China, France, plus Germany (P5+1) and Iran announced 2nd of April that they had reached a framework to an agreement regarding Iran’s nuclear program. If ratified by the parties it will result in lifting of international sanctions. This will eventually lead to opening of the closed Iranian economy, including export of oil.
After a strong start to the year, equity markets faced some head wind in March due to temporary shortage of fuel. Looking 12 month forward, the stock market is expected to remain the best asset class, but we consider its potential during the next several months as more limited. We still see the biggest potential in Europe where strong macro has increased the likelihood of positive GDP surprises and earnings upgrades. Nordic equity valuations look challenging as the premium to its own history is more that 30%. That said, with the extreme interest rate picture we are likely to see continued inflow into the asset class.
By Hans Kristian Hals, Head of Investment Strategy