Economic Outlook September 2014

Economic uncertainty once again hits investors.

The stock market rally from August continued into the first half of September. Stable macro from the US combined with further easing from the European Central Bank (ECB) increased risk appetite among market players. Then the uncertainty entered back into investor's minds, mainly driven by softer macro data from the EU and China.

The S&P 500 ended September with a fall of 1.5% after returning 4.0% in August. The European markets were relatively flat, while Nikkei 225 rose 4.86% last month. Worst hit was MSCI EM Asia falling 4.0%. After performing about 4.5 % the first six months of 2014, global high yields have been relatively flat the last quarter. The main underlying reason is that investors are about to realize that spreads have come down to a very low level, and the high return seen over the last 4-5 year will not continue.

The US economy continues to show strength, while the European data is on a softer path. SEB expect further evidence of economic and monetary policy divergence between Europe and the US in the short term. We expect the first rate hike from FED in April next year. In Europe the ECB continues its monetary stimulus measures to boost inflation and growth prospects. Until we see proof of increased growth prospects in Europe, the USD will probably continue appreciating against the EUR.

Geopolitical tensions in Ukraine and the Middle East persist, but do not appear likely to have any significant impact on market performance, except for those countries directly affected. In the dispute in Ukraine there are signs of president Putin trying to cool down the conflict. In Brazil a nail biting election is underway. Incumbent president Dilma Rousseff won the first round with support from 42% of the voters, but did not get enough support to avoid a second round. The big surprise was that Marina Silva did not qualify for the second round. Instead Aecio Neves of the Brazilian Social Democtatic Party came in second with 34% of the vote. It is also expected that the majority of Silva's supports will back Neves in the second round the 26th of October. Brazil's economy is in desperate need of new impulses, and most financial market participants consider Neves the most market friendly.

The oil price continued to lose ground in September, and is now trading around USD 92/brl. This clearly negative development comes in addition to the cost cutting focus from the oil majors. Thus, investors are starting to fear the consequences for the whole industry. If the soft momentum proceeds, investors cannot expect oil and oil service heavy Oslo Børs to outperform rest of the world. Oil service stocks are particularly hard hit. For example Seadrill and PGS are down about 33% and 47% respectively since last October, adjusted for dividend.

In the UK, Scots decided to remain part of the 307-year old union. The turnout was about 85%, and the No to independence won by 55.7% to 44.7% for the Yes side. The GBP, the London Stock Exchange and British government bonds gained strength in the aftermath of the election.

Strong US growth along with liquidity provided by central banks will help sustain stock markets for quite some time to come. Risks have decreased, but high valuations will require support from earnings. In the emerging world there are a lot of uncertainty; however, opportunities may arise in the aftermath. When looking at these markets one must also consider the exchange rate, and JPMorgan Emerging Markets Currency Index are now trading close to 10 year low against the USD!

By Hans Kristian Hals, Head of Investment Strategy