Summary of the report May 2019
We are in an interesting situation, with shares and corporate bonds priced much higher than a few months ago while economic turmoil has receded. After the last issue of Investment Outlook, we chose to reduce the risk level in our portfolios to a neutral stance, with some overweighting in global equities compared to Swedish equities. In fixed income, we remain overweight in corporate bonds. But greater uncertainty suggests a period of continued large price fluctuations.
How different asset classes have performed
Expected returns, next 12 months
|Emerging market equities||7.9%||14.2%|
|Fixed income investments||Return||Risk|
|Corporate bonds, investment grade (Europe)||0.9%||2.7%|
|Corporate bonds, high yield (Europe)||3.7%||3.9%|
|Emerging Market Debt (lokal valuta)||7.0%||8.1%|
Challenging valuations, due to rising prices
- Nervousness, risk aversion and falling share prices late in 2018 have been replaced by greater optimism and rising stock markets.
- The MSCI All Country World Index in local currencies, including dividends, reached all-time highs in early May.
- Share prices have climbed more sharply than earnings. We thus foresee limited potential from current levels.
- The quarterly corporate report season has been better than feared. The low earnings expectations have been exceeded.
- We are sticking to our forecast of low single-digit growth figures for global earnings.
- Fear of American health care reforms has held back the upturn in the health care sector, but valuations are attractive in a long-term perspective.
Neutral to negative view on Nordic stocks
- Risk appetite has increased sharply so far in 2019: risk of a sharp downturn.
- China has been a leader in this year’s stock market rally, with Nordic companies also climbing.
- Big differences in market sentiment between sectors – favouring industrials and convenience goods over forest products, banking and construction. However, we prefer forest products over industrials within cyclical sectors.
- Banking shares are being squeezed by worries about money laundering.
- Neutral valuations on Nordic stock markets as a whole.
Fixed income investments
Central banks continue stimulus measures
- The US Federal Reserve is signalling an unchanged key interest rate in 2019 and 2020.
- Sweden’s Riksbank will need to postpone its next rate hike until July 2020.
- Credit markets are benefiting from the more dovish central bank policy stance.
- Economic growth and undervalued currencies will provide support to emerging market bonds.
- Broad stock market upturns will provide support to equity long/short hedge fund strategies with positive net exposure.
- Clear trends early in 2019 have generated a recovery for trend-following strategies.
- Relatively sharp movements in the bond and foreign exchange markets are leading to mixed performance by macro funds.
- Rising stock market volatility should provide return potential for hedge funds.