Back to the growth track
We believe that the world economy will avoid a recession and largely revert to its historical growth track this year and next. We also expect corporate earnings to rise this year and during 2025. Inflation will subside, and central banks will be able to cut their key interest rates, though at varying speeds and magnitudes. Valuations and general risk-taking among investors have climbed, but there is still upward potential.
A lot has happened since our last issue, even though only three months have passed since it was published. Geopolitical turmoil in the world has intensified. The global growth and inflation picture is mixed, with a higher level of economic activity and inflation in the United States than elsewhere. This has pushed up government bond yields and has both delayed and reduced the future key interest rate-cutting path of the Federal Reserve and, to some extent, other central banks. But investors have taken this in stride, accepting the delay and instead being thankful for higher growth. We believe that the rest of 2024 will be characterised by an environment of falling inflation and gradually less restrictive central banks.
Allocation
We foresee an opportunity for positive returns on both fixed income investments and equities. This means that the entire spectrum, from low-risk to high-risk portfolios, should be able to deliver positive absolute returns. In our model portfolios, we continue to have a moderate overweight in equities. If risk appetite continues to rise, these portfolios should be able to generate excess returns relative to our benchmark indices. Risk appetite or positioning among investors has risen a lot since its most recent low in September 2022 but has not yet reached euphoric levels. If the economic cycle turns out as we forecast, there is a good chance that the investor community will take another step upward on the risk scale.
Valuations and stock market performance
The stock market has been stronger than feared, as earnings and profit margins have turned out better than expected and global recession has not materialised. Large portions of the stock market have relatively high valuations, while others are undervalued. This discrepancy is likely to narrow as the economy recovers. Chinese IT-related growth companies, as well as small caps, have been mentioned as especially attractive since there is room for both earnings recovery and expansion of multiples. Given the tug-of-war between earnings recovery and stubbornly high interest rates, equities will continue their consolidation until trends become clearer.
Global equities
- This year began with a broader recovery in global equities
- Valuations of America’s fast-growing information technology (IT) giants have levelled off
- Sharply higher artificial intelligence (AI) investment budgets will benefit many sectors
- Key rate cuts and improved economic conditions will benefit low-valued small caps
- Investors are becoming more interested in depressed Chinese growth companies
Fixed income investments
- Changing market expectations during 2024 – from seven Fed rate cuts to two cuts, starting in September
- We expect the Riksbank and European Central Bank to cut key rates four times in 2024
- Long bond yields in Sweden and the US will move in opposite directions this coming year
- Limited room for further narrowing of credit spreads, given their current low levels
- Continued key rate cut potential in emerging markets, but the Fed may slow these plans
Nordic equities
- Corporate earnings forecasts are rebounding
- An encouraging Q1 2024 corporate report period; the inventory cycle has bottomed out
- Lower interest rates and bond yields, but how much?
- Banks will benefit from our current interest rate scenario
- Gold fever and a copper shortage have boosted mining investments
- Political risks are being ignored, but the risk of trade wars is worth monitoring
- Can we expect a consolidation after the record surge in Nordic equities?
