Economic Outlook October 2015

Risk willingness returned in October as volatility fell and stocks recovered


After two months with sharply falling equity prices, global equity markets rose and volatility fell in October as risk willingness returned. The best performing index was Japan’s Nikkei 225 which increased its value by 9.75 per cent in October, followed by S & P 500 and Bloomberg European 500 rising 8.30 per cent and 7.83 per cent respectively. Oslo Stock Exchange was up 5.71 per cent for the month. Norwegian kroner appreciated against most currencies.

Market participants have for some time waited for a global PMI recovery. The lack of confidence in global GDP growth was one of the explanatory factors for the recent sell-off in global financial markets. Thus the strong global PMI numbers for October, where all regions contributed, was welcoming news. The outflows from emerging markets assets also reversed as Fed delayed its much expected interest rate hike. The ECB contributed to the positive news flow by more than indicating that it is working on a plan for further monetary stimuli. In addition, People’s Bank of China lowered interest rates and reserve requirements on 23rd of October.

For the Nordic region the 3rd quarter earnings season has so far been mixed. Top line growth is behind schedule, while earnings (EBIT) came a little better than consensus among analysts expected. However, new orders were on the weak side. The last few years, companies have increased earnings by cutting costs, not by increased sales. Global stock markets have also received help from falling interest rates. This trend cannot continue forever. Investors need to see, and believe in top line and earnings growth for the positive equity trend to continue. In this respect, new orders are particularly important for companies. The most recent Purchasing Managers Index indicated that orders are picking up.

It is for the time being our belief that global activity will rise, and that we will see healthy returns for the next twelve months. Europe is still our most favored geographical region where growth is broadening out, helped by a relatively weak euro. 

By Hans Kristian Hals, Head of Investment Strategy