Monthly Comment from Swedbank Investment Center: Improved global business cycle

07-05-2013 17:00

Reduced political uncertainty in Europe's crisis countries, surprisingly positive order intakes and consumption in the US, and continued monetary policy stimulus mean that the improved global business cycle scenario remains.

"This situation motivates Swedbank to reaffirm its recommendation for active investors to be overweight in equities in May,” says Sara Arfwidsson, market strategist at the Investment Center

The global economy continues to recover, but at a slower pace than previously expected. The industrial sector has shown signs of weakness and production has stagnated in both Asia and Europe. However, order intakes and consumption were surprisingly positive in the US. The global monetary policy continues to act as a stimulant, particularly in the US and Japan. A slight fiscal policy tightening, particularly in the eurozone, and strong financial markets point to a more positive business cycle in the coming months. Emerging markets continue having a growth rate that is lower than the trend.

Sweden
Consumption will be what drives the Swedish economy forward in the near future. The Swedish stock market fell sharply during the report season's initial week, it then recovered, and ended April as unchanged. Following the Riksbank's statement in relation to the monetary policy report, the market now believes in a rate cut, probably in October. Swedbank, however, does not believe any further rate cut will take place. The Swedish krona is expected to remain strong compared to other currencies.

Europe
A fall in the Purchasing Managers' Index for the industrial sector indicates that the eurozone remains in recession. The biggest disappointment is Germany, which has done relatively well in recent months, but where company order intakes and optimism have now decreased. Despite the negative figures, there is reason to believe that the recession may be nearing its end. Stock levels in Europe are very low, indicating a need for increased production in the future. The European Central Bank cut interest rates on 2 May, which will have a stimulating effect on the economy. Another positive growth factor is that fiscal policies in the crisis countries probably will be less restrictive. Focus will shift from tax hikes to reforms and long-term plans to improve public finances.

US
Several factors point to continued expansion in the US. There are clear signs that private consumption is increasing. New home sales continue to rise and, in combination with a low supply, indicate rapid growth in housing construction in the future. The economy will also be buoyed by rising asset prices. It is also positive that petrol prices in the US continue to fall and are now lower than in spring 2012. Unemployment is also falling and is the lowest since 2008, even though the labour force is growing. It is positive that more people are choosing to join the workforce instead of remaining outside it – since they see their chances of getting work increasing.

Asia
Earlier this year, the Bank of Japan, launched an aggressive stimulus programme to take the country out of deflation. Among other things, the central bank will increase the purchase of bonds and other assets as well as double the maturity of the bond portfolio. The money supply will be doubled in order to achieve an inflation target of two per cent in two years. The recent G20 meeting supported Japan's economic stimulus strategy since the purpose was not to weaken the yen but to get out of deflation/recession. Consumer confidence and business confidence have increased thanks to new incentives in the form of quantitative easing, a weaker yen and a rising stock market.

Emerging markets
Emerging markets continue to have a growth rate that is lower than the trend. Rising consumer prices in Brazil entailed the first interest rate hike in two years. Inflation is trending upwards and is now above the central bank's target. China reaffirms relatively low figures for industrial production, retail sales and the Purchasing Managers' Index and this means lower than expected.

Sara Arfwidsson, market strategist at the Investment Center