Macro comment: Peter Lagerlöf sums-up the first half of the year
"I think the first half of the year was defined by the low volatility. Share price movements were unusually small and changes in interest rates limited. Economic and political risks took a back seat to stronger global growth and rising corporate profits.”
How did the equity market perform during the first half of the year?
Global equity markets continued their upward trend during the first half of the year, and interest rates remained at historically low levels. The Swedish equity market (SIXPRX) increased 10.8 per cent, while government bond yields increased marginally. We continued to see many IPOs on the Swedish stock exchange, which is positive given this provides us portfolio managers new and exciting investment opportunities. The newly listed companies comprised a broad set of sectors, with a weighting on companies in the healthcare sector.
How did the Swedish economy fare?
The Swedish economy continued to grow faster than most EU countries, but it did not quite reach the forecasted level. Employment increased, which resulted in a surprisingly large surplus in public finances. However, inflation remained below the Riksbank’s target, which meant that the repo rate was maintained below zero and the purchase of government bonds continued, albeit to a more limited degree.
How is the economic climate?
The economy picked up pace during the beginning of 2017, primarily due to increased investment activity. This was particularly evident for construction investments, which benefit from the extremely low interest rates. Investments within the mining sector were also markedly higher driven by rising metal prices and pent-up demand for fixed investment.
Global growth improved – driven largely by Europe and China. In Europe, election results stemmed expected political instability as extremist parties gained less support than originally anticipated. The economic recovery spread to more European countries, at the same time as growth accelerated for the larger EU nations. China stimulated the economy through fiscal policy with intended results on demand. However, the US did not see the expected increase in growth as the newly elected president has had difficulty in gaining Congressional support for the promised growth-friendly tax reforms and infrastructure investment initiatives.
What distinguished the financial markets?
I would say the very low volatility. Daily stock price movements were unusually small and interest rate movements were limited. Economic and political risks were pushed to the background and instead focus was on the stronger global growth and rising corporate profits.
What are your comments regarding company earnings reports?
First quarter earnings reports were evidence of economic growth. For the first time in several years, earnings reports led to upward revisions in profit forecasts for cyclically sensitive companies and the tone was significantly more optimistic than previously. Many of the industrial companies were among the share price winners for the first six months.
Generally, Swedish listed companies have good profitability and a high dividend capacity. During the first half of the year, Swedish companies distributed a total of about SEK 200 billion to shareholders, where Nordea, H & M and Swedbank paid out the most.
Which risks should one focus on going forward?
The outlook for good returns on equities continues to be favourable for long-term savers. However, the potential in the short term is limited as corporate valuations are relatively high. Political risks are also still high, where the foremost risk is whether the US will withdraw from international agreements and devise economic policies independently that may adversely affect international trade. Other risks include the results from the current Brexit negotiation, the state of affairs in North Korea and Russia’s role in global political security.
Peter Lagerlöf manages Lannebo Mixfond, Lannebo Komplett and Lannebo Sverige Flexibel. He is also a macro-economist and he has previously worked as Head of research in the industry.