Economic Outlook November 2014

Solid earnings in Q3 and global equity markets rose further. In the oil market conventional mindset is challenged as Opec did not cut its production, and oil prices fell further. 

Corporate earnings in Q3 surpassed analysts’ predictions. Thus the positive market momentum the latter half of October continued into November. The global equity market moved upwards, with S&P gaining 2.45%, Stoxx Europe 600 up 3.10%, and Japan’s Nikkei 225 rose 6.40% in November (all in local currency). From a Norwegian investor’s perspective November was more troublesome with the oil price continuing its free fall. The Brent ended the month at USD 70/brl, falling USD 14/brl for the month. In the beginning of October the price was USD 94/brl. Thus Norway’s OSEBX fell 1.13% in November.

Evidence of a strong and resilient US economy continued throughout the month as both consumer confidence, ISM and the labor markets showed strong readings. As the US Federal Reserve recently ended its simulative bond purchases, the focus of attention has shifted to when the central bank’s first key interest rate hike will be. SEB foresee a prolonged period without any rate adjustment, and has changed our forecast for the first rate hike from April to September 2015.

In Europe the economic numbers continue to be mixed. There is evidence of improvement in economies that have made an effort to reform themselves, however, this is not the case in countries such as France and Italy. The relatively bleak picture is helped by an increasingly eager European Central Bank President, Mario Draghi, repeating that ECB is prepared to broaden and intensify its actions if current policies are not enough to lift euro zone inflation expectations and economic performance. This further increased the probability that the ECB will launch government bond purchases this winter.

The main event from China last month was the unexpected rate cut by the People’s bank of China. Economic statistics continued to fall below expectations, leading the bank to lower its one-year lending rate by 40 basis points. In Japan economic readings showed that the country once again is in recession. However, Prime Minister Shinzo Abe got the headlines as he announced that the planned consumption tax hike in October 2015 will be postponed until April 2017 and that the government will launch a fiscal stimulus package worth JPY 3 trillion. He also called a snap election in mid-December.

Investor sentiment towards oil and oil service deteriorated in November as the price of oil fell further. The main cause in the drop was due to speculation that Saudi Arabia, Opec’s by far largest producer, would “force” the other Opec countries to keep up its current oil production. The cartel did indeed decide not to cut its production, and oil price continued its fall. There are several reasons behind Saudi Arabia’s thinking; firstly, it is trying to send signals to the other Opec members that they also need to be responsible for a potential production cut, i.e. reinstate discipline within the cartel. Secondly, it is testing the marginal cost of US onshore barrels. Thirdly, it will try to reduce actual or planned new production capacity, being onshore US or elsewhere.  Short term the strategy has worked, as the price of oil is down more than 35% since this summer.

Moving forward, the firm economic growth in the US in combination with softer monetary policy in China, Japan and Europe is likely to help the global economy reach self sustainable growth during 2015. As most of the world is net importers of oil, the steep fall in oil price is likely to foster further economic growth. The risk is that ECB continues to drag its feet, and are not able to get the sufficient internal support to increase the most expected bond buying programs. If oil price recovers, helped by a global lift in industrial production and Opec agreeing on reducing its oil production, Oslo Børs is likely to recover lost ground. However, if oil price remain at today’s level, investors should look elsewhere to invest their money. As we approach 2015 we are quite positive on Europe. It is likely that momentum in industrial production will turn upwards. In addition we see evidence of increased willingness by banks to lend as lending standards are becoming less strict. Together with increased demand for loans from both house-holds and corporations, the momentum for increased economic activity is good. Thus we foresee an increased focus on European equities as we move into the next year. 

By Hans Kristian Hals, Head of Investment Strategy