Economic Outlook May 2016

Risk appetite continues upward despite Brexit concerns

Risk appetite continued its positive development as global equity markets continued to climb in May. The best performing market was the Japanese. The Nikkei 225 rose 3.40 per cent in May. In the USA, S&P 500 increased 1.8 per cent while Europe’s Bloomberg 500 was up 2.60 per cent for the month. Oslo Stock Exchange’s OSEBX gained 1.80 per cent in May. After a strong period, the Norwegian krone lost some ground in May. It depreciated 4 per cent to the American dollar and 0.90 per cent to the Euro. The oil price continued its upward trend and ended the moth just short of $50/bl (August contract).  

The minutes from the US Federal Reserve (Fed) meeting in late April was more hawkish that expected. Thus, the likelihood of a rate hike during the summer rose considerably. The US dollar climbed on the news. However, the oil price stood firm. Considering the close negative correlation between the USD and the oil price, this is good news. It also proves that market participants start to believe that higher oil prices are here to stay. SEB updated its forecast, and now expect the first rate hike in July, another in December and one in 2017. It is worth mentioning that the market mood changed after the last non-farm payroll numbers were released as it showed that fewer jobs than expected were created in the US economy in May.

Another theme that occupies investors is the potential Brexit. The referendum is held 23rd of June. The impact will mostly be political, but also economic and in financial markets. SEBs main scenario is that the UK will remain in the EU. The British pound has already lost value to the American dollar and to a lesser extent to the Euro. If the leave camp wins, we expect the effects to be most noticeable in the UK where growth probably will be revised down. Investors should also expect the Pound to lose further ground. On the longer term, the country will most likely continue to be open and market oriented. For now, it seems like the stay camp has most tail wind.

We continue to favor equities and high yield bonds. We believe the upcoming British referendum has put some downward pressure on European equities which has underperformed the US’ year to date. However, we believe that European equities will catch up on the lost ground as economic indicators have remained solid, and the arrows for earnings growth are pointing up.

By Hans Kristian Hals, Head of Investment Strategy