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Market Outlook: New variant is shaking up stock markets

Worries about the spread of a new coronavirus mutation caused a slide in stock markets last Friday, November 26. Sweden’s All-Share Index (OMXSPI) lost 5.2% between November 19 and 26, while in the United States the broad S&P 500 Index recorded a 2.2% downturn. Ten-year US Treasury yields fell and are now trading at around 1.45%.

Oil prices also reacted to the news, plunging last Friday. On Monday, November 29 they rebounded somewhat, but since then they have fallen again. Brent crude oil is now trading at around USD 70/barrel.


The World

Spotlight on the Omicron variant of COVID-19

The mutated variant of the COVID-19 virus that was discovered in South Africa, which is now called Omicron, has caused major concern all over the world. Flights from Southern Africa have been stopped by a number of countries in an attempt to keep the virus out. China, Japan and other countries also plan to introduce broader new travel restrictions. Preliminary data from South Africa indicate that Omicron triggers relatively mild symptoms (although most cases were in younger people), and so far there have been no reports of any deaths connected to the new variant.

In testimony to a US Senate committee on November 30, Federal Reserve Chairman Jerome Powell warned that the new mutation may pose a risk to the economic recovery, while uncertainty about inflation may increase. According to Powell, worries over the new variant could “reduce people’s willingness to work in person, which would slow progress in the labour market and intensify supply-chain disruptions.”

Mr Powell also indicated that the Fed is planning to accelerate its tapering of stimulative bond purchases, ending them a few months earlier than the original date of June 2022 and thus opening the way for a key interest rate hike as early as next summer

Exciting macroeconomic figures this week

Preliminary figures for November inflation in Europe were published on November 30. According to Eurostat’s flash estimate, year-on-year inflation in the 19-country euro area rose to 4.9% last month, compared to 4.1% in October. On Friday, December 3, the focus of attention will shift to the United States, which will release labour market statistics for November. During October, job growth accelerated, but American labour force participation remains at very low levels. We expect US employment to continue climbing in November.


The Nordic countries

Swedish electricity prices set new records

Because of cold weather, electricity prices in Sweden have climbed to new record levels. On November 29 the country recorded the highest average price since it was divided into four price areas in 2011. If these levels persist during the winter, we see an upside risk for CPIF inflation (consumer price index less interest rate changes), which might result in an inflation rate somewhat above 4%.

The financial market has lowered its expectations of key interest rate hikes by the Riksbank after the central bank’s policy announcement on November 25 and the recent downturn in risk appetite, but high electricity prices may again push expectations upward.


Latest Investment Outlook: Sustained momentum despite headwinds

We can summarise 2021 as a year of strong recovery. The adaptability of the corporate sector has been impressive, and strong earnings have led to large stock market gains. The outlook for 2022 is less clear. The growth picture looks robust, but disruptive factors have lowered potential stock market returns.
Read our entire quarterly publication here

Our market view

Although share prices have been somewhat shaky in recent days, this seems natural in light of the strong stock market performance of the past several weeks. That upturn pushed several major equity indices (especially in the US) to or above their earlier all-time highs. Given the worries that had accumulated earlier this autumn, such stock market strength may seem surprising. We have seen a weakening in some macroeconomic statistics, continued problems with various bottlenecks in supply chains, soaring commodity prices and dramatically higher inflation. This has led to forecasts of a faster withdrawal of central bank stimulus measures. The US Federal Reserve is now starting to taper its bond purchases, and expectations of future key interest rate hikes have been moved forward.

Yet investors appear to have focused more of their attention on a number of positive forces. The inflation surge is widely regarded as transitory, which seems probable even if high inflation persists for another several months. Investors are also pleased by strong third quarter corporate reports – on the whole, listed companies have continue to show an impressive ability to manage current challenges. We have also recently seen indications that the economic growth outlook has again improved after a slight dip early this autumn.

The fixed income market has remained fairly stable despite recent turbulence in long-term bond yields. Investors probably believe that expected central bank policy tightening and key interest rate hikes will keep long-term inflation under control. We largely share this view but still expect bond yields to climb in response to future key rate hikes – though not on a scale that will necessarily jeopardise either economic growth or equity valuations.

As indicated in the recently published issue of SEB’s Nordic Outlook, we expect growth to remain healthy, although we have lowered near-term forecasts due to recent turbulence. Inflation is naturally a source of concern; if it gets stuck at high levels, along with continued high commodity prices and so on, it will create clear headwinds. Yet there are indications that many of these effects are related to the reopening of economies after the COVID-19 pandemic and are of a transitory nature. Equities will thus continue to enjoy strong fundamentals, including healthy growth and low interest rates.

From recovery to normalisation

In this context, it is important to bear in mind that the economy − and financial markets − are now moving towards a new phase in which powerful and fairly straight-line upturns in growth and corporate earnings during the recovery will now give way to a period of normalisation. During such a transition, problems like the ones we are now seeing often arise. In the short term, the big question for future market performance will be how existing inflation and bottleneck risks play out, along with the ability of companies to continue coping successfully with existing challenges. Looking further ahead, the key question will be how the normalisation process is working − how quickly economic growth will fall to more normal levels and how much interest rates and bond yields will climb during this phase of the economic cycle.

In recent months we have signalled a slightly increased level of caution by lowering the proportion of equities in the portfolios we manage. But we still hold more equities than in a normal situation, and a relatively large proportion of our fixed income investments are in somewhat higher-risk corporate credits. This reflects our view that growth will still remain healthy during the coming year and that increases in interest rates and yields will be relatively limited. However, the time is ripe to adjust our future expected return figures lower − compared to the sharp recovery since last spring − and to prepare for more volatility ahead, both in stock markets as a whole and between different sectors and styles/types of equities. In other words, more turbulence may be waiting around the corner, but as long as positive fundamentals persist there is still some upside potential for stock markets.