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Vaccines and Biden: A path to normality?

Image of Slussen in Stockholm covered in snow.

Vaccine breakthroughs and the change in US presidents can be expected to entail a return to a more normal, predictable world order. This is positive for the stock market, especially for green tech companies and companies with a large exposure to international trade in goods. We expect this to lead to increased corporate investment and less turmoil in the financial market. 

This is a summary – read a longer article on pages 10-14 of the latest Investment Outlook (pdf)

 

More stability, but no radical reforms

With Joe Biden as president, the stage is set for more stability and better relations with the rest of the world, especially other OECD countries. However, the probably Republican-controlled Senate will block many of the more radical reforms that many people had expected from a Democratic president. This suggests that there will be no tax hikes, Green New Deal or expanded health care reforms and should mean less economic stimulus than the scenario that seemed most likely before the election. 

A second COVID-19 wave has slowed the recovery, but vaccines are raising hopes

Since its collapse in March-April, the global economy has shown signs of a strong though very uneven recovery. News of effective vaccines against COVID-19 has raised hopes of a more full-scale recovery in 2021.

Overall, the picture conveyed by corporate earnings reports even as soon as the third quarter is unambiguous. We see a clear recovery from the abyss noted early in the second quarter, although the pace and level vary significantly. But in Europe, the feared second COVID-19 wave is now a fact. From an economic perspective, one positive factor is that political leaders are now more cautious about reintroducing restrictions that limit economic activity. Unfortunately, the spread of the virus is so rampant that it has not been possible to avoid new restrictions. Those industries already hardest hit are again the biggest losers from this.

Resilient earnings

Although third quarter earnings reports were generally encouraging, 2020 is a lost year because of the coronavirus crisis. Before the crisis broke out, there were signs of some improvement in global industrial activity. Instead we now expect negative earnings growth for the full year of nearly 20 per cent both in Sweden and the Nordic region overall. Aggregate earnings forecasts for the Swedish listed companies that we track have been revised upward by more than 30 per cent from their low earlier this year, but are still 24 per cent less than 12 months ago.

“Earnings forecasts have been revised upward by more than 30 per cent from their low”

Even before the latest positive news about vaccines, we were expecting a strong recovery as early as 2021. Although earnings forecasts for 2021 are still more than 10 per cent lower than before the coronavirus crisis, these have also been revised upwards by more than 15 per cent from forecasts made earlier this year. This means not only an improvement of more than 30 per cent compared to 2020, but also an improvement of more than 10 per cent compared to 2019.

Revenge of the dividends in 2021?

For a number of years, investors in the Nordic countries and around the world have rejected dividend stocks, especially in favour of growth-oriented companies.

In an in-depth article on dividends on pages 19-23 of the latest Investment Outlook  we wonder whether this trend has now gone too far. We believe that a diversified basket of high dividend yield stocks in companies with relatively stable operations can be an attractive investment alternative.

Fossil fuels or green infrastructure

The battle between Clean Coal Trump and Green New Deal Biden was a nail biter. A divided US government, with the Senate as a counterweight to the president reducing the risk of tax hikes and health care reforms, also means that the green tech sector is a relative loser. But it is a relief for this sector that Biden will become president – that bodes well on the regulatory front.

Regardless of the US election outcome, it is certainly positive for the green tech sector that the EU and most European countries as well as various Asian countries have announced plans this year to accelerate their transition to renewable energy sources and phase out fossil fuels.

In the Nordic countries, there is a small number of major companies devoted exclusively to green tech, but also a number of industrial companies with a smaller segment of their operations focused on these areas and a very large number of smaller tech start-ups. For the most innovative development companies, the commercial viability of their own technology is obviously most important in determining whether they will be successful or not. Provided that good, profitable solutions are developed, it is naturally only positive if the market for solutions to improve sustainability also grows and is prepared for them.

Summary

A coronavirus vaccine and a US presidential election outcome that can be expected to provide better stability and predictability are positive factors for the stock market and for economic growth. The second COVID-19 wave is slowing but not stopping the recovery. Listed companies have so far weathered the coronavirus crisis with much better earnings growth than was feared earlier this year.

Dividend stocks have performed weakly for a decade, and the trend has accelerated this year, but sooner or later such a movement will reverse, and we are not ruling out revenge for dividends and dividend stocks in 2021.

The biggest winner from recent political developments around the world is no doubt environmental technology stocks. We see an upside for green tech both in the short and long term and note that the transition to renewables has only just begun. However, there will probably not be any Green New Deal in the US anytime soon, which means somewhat slower growth than many people had hoped for before the election. Nonetheless, conditions for the industry are probably better than ever both in the US and the rest of the world, not least due to green stimulus programmes in both Europe and Asia, which will carry on regardless of the balance of power in America.

Image of Esbjörn Lundevall, equity analyst at SEB.

Esbjörn Lundevall

Equity Analyst
Investment Strategy

Read more

You are welcome to read more in the “Nordic equities” section on pages 10-14 of the latest

Investment Outlook (PDF)
Summary (PDF)

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