Hints on global and regional economy growth from Nordic Financial Group

POHJOLA'S ANALYSTS: YIELDING RETURNS IN A SLOW GROWTH ENVIRONMENT

There is a fragile global economic recovery underway. Emerging economies, led by China, will once again remain the main engines of global economic growth while developed countries will plod along. The US economy will slow to around 2% and the euro area expects zero growth. The fiscal policy is still a drag on growth in developed countries. Fiscal policy adjustment has advanced more in the euro area than in the USA. The current extremely easy global monetary policy will help compensate for the negative effects of fiscal policy on growth.

- In asset allocation, we will overweight equities and corporate bonds and underweight government bonds. Our recommendation for the allocation of commodities is close to neutral. According to the analysts, the recommendation is affected by reasonably positive attitude to risk appetite, return potential in equities supported by accelerating profit growth and dividends, expectations of higher long-term rates in the USA and the higher return/risk potential of high-yield corporate bonds in dollars than bonds in emerging markets.

The overweight equity exposure is justified by the fact that the gradual global economic recovery will give some support to companies' profit performance. Companies in Europe and the USA are revising down their profit forecasts to a lesser extent.

- Stocks have gained considerably but the continued decline in equity risk premiums as the euro crisis eases, declining trend of corrections to negative forecasts and low return expectations of alternative investments argue for our positive view of equities, explains Jarkko Soikkeli, Equity Strategist.

- Our favourite sectors for early 2013 are energy, consumer goods and construction. When it comes to other sectors, we take a more cautious view of media, forest industry and healthcare. Our favourite stocks for early 2013 are Metso Corporation, Metsä Board, Neste Oil Corporation, Nokian Tyres Plc and YIT Corporation. At the same time, we recommend avoiding the following stocks: Orion Corporation, Pöyry PLC, Sanoma Corporation, Tieto Corporation and UPM-Kymmene Corporation, continues Soikkeli.

In the bond market, Pohjola's analysts expect the Riksbank to cut its key rate twice by 25 basis points and the ECB once by 25 basis points. Economic fundamentals in both Sweden and the Eurozone also argue for lower money market rates and short swap rates. With respect to long-term rates, the greatest upward pressure is on US interest rates. According to the analysts, the recommended duration in the Eurozone is seven years.

- We expect corporate bonds to continue to gain momentum and risk premiums to continue to decline moderately. In our asset allocation recommendation, we shift to an overweight in high-yield bonds and, to a moderate extent, Investment Grade bonds. We recommend maturities of over three years. When it comes to Finnish corporate bonds, our view is that Nokia Corporation and Nokian Tyres Plc exhibit the most attractive the risk/return potential, says Jukka Ruotinen, Head of Fixed Income and FX Research.

- Although we believe that the euro will strengthen against the US dollar in the long run, we expect the currency pair to weaken in the next few months, sent down by lowering euro rates. We also expect heightening expectations of interest rate cuts to weaken the Swedish krona. In the meanwhile, the Russian rouble will benefit from higher crude oil prices and the stabilisation of capital flows.

Our favourite commodity is crude oil due to geopolitical risks and the constrained demand/supply picture. A positive macroeconomic sentiment is also a driver for movements in crude prices. It is possible of investors to benefit from this because the forward curve for crude oil market price development is declining. The change of power in China will, for its part, foster developments in investments in the country and thus demand for base metals too. Pohjola's analysts keep, however, commodity allocation neutral because of the risks associated with the prices of natural gas and agricultural products.

Pohjola Bank plc

Pohjola is a Finnish financial services group which provides its corporate and institutional customers with a diverse range of banking, non-life insurance and asset management services and private individuals with an extensive range of non-life insurance and private banking services. 

Pohjola Bank plc (Pohjola) is part of OP-Pohjola Group, the leading financial services group in Finland. Pohjola acts as the Group's central bank and is responsible for the Group's international operations. OP-Pohjola Group consists of over 200 member cooperative banks and the Group's central institution, OP-Pohjola Group Central Cooperative, with its subsidiaries and closely-related companies, the largest of which is Pohjola.

source: Thomson Reuters One

The Euro-zone drags on Swedish Economy

The Swedish central bank forecasts a slowing in the Swedish Economy due to weakness in the euro area. Meanwhile the Swedish Trade Council, also forecasts poor economic development in important trading partners. Not least, the Euro zone is expected to tip into recession, with two consecutive quarters of negative growth. With exports standing for 50 percent of GNP, Sweden will be strongly affected.

The Swedish central bank lowered its interest rates against a background of less inflationary pressure and weaker economic expectations. Their press release states, “the worsened outlook is causing households and businesses to delay consumption and investment,” and points to significant uncertainty about future economic developments.

Against this background, the central bank’s Executive Board indicates that additional changes to interest rates can be necessary if the problems experienced in the Euro area deteriorate, stating, “the public-finance problems in the euro area in particular may become more serious and have more negative effects on the Swedish economy. In this situation, the repo-rate path may need to be lowered.”

As well, forecasted growth in Swedish GNP is cut for coming years, including growth of 1.3 percent for 2012, compared to the previous forecast of 1.5 percent.

The Swedish Trade Council also issued new forecasts where they still expect a slight increase in exports for 2012, though a smaller increase than forecasted in September. “The debt crisis in the Euro zone has forced austerity policies that act as downward pressure on the economy, which can cause lower public revenues as households and businesses lose confidence in economic developments. The greatest risk looking forward is that insufficient measures are taken to resolve the debt crisis in the Euro zone,” notes the Swedish trade council Chief Economist Mauro Gozzo.

The Trade Council forecasts an economic recession in the Euro zone, which also will affect Central and Eastern Europe. Export markets in Scandinavia are expected to grow 3 percent, but in West Europe by 1.5 percent, and in Central and East Europe by 5.5 percent. Moreover, China, currently the most important locomotive in the global economy, shows initial signs of contraction.