With oil and gas prices soaring and an energy crisis exacerbated by the war in Ukraine, it is perhaps no wonder that the energy-rich Oslo Stock Exchange has fared better than most other stock markets.
In fact, the benchmark index reached an “all-time high” on Tuesday and ended the week marginally 0.15 percent below its peak.
But with the prospects of higher interest rates, rising inflation, and the turmoil of war continuing in Europe, it’s no wonder Carrie Deo Andersen, chief economist at Akershus Eindom, describes the market as “jittery.”
You have to pay close attention to price and labor market indicators because then you get an idea of what central banks are going to do, says Deo Andersen.
Last week, Norges Bank raised interest rates for the third time since the historic zero level during the Corona pandemic. On Thursday, the key interest rate was raised to 0.75 percent, at the same time the central bank announced seven more rate increases.
In the same week, the Federal Reserve (Fed) shifted the language about rising inflation, after raising its key interest rate to 0.25%.
The spiral of fear of wages and prices
This week, new employment figures are coming from the USA. The numbers are often referred to as the “most important numbers of the month” because they give a good picture of the state of the economy.
Unemployment is expected to decrease to 3.7 percent, which is lower than what is considered normal. The central bank fears a wage-price spiral, that is, higher prices will cause wages to rise, which in turn will lead to higher prices, says Dew-Andessen.
Among other things, expectations for strong employment numbers led the Federal Reserve to announce further rate hikes.
Last week, Central Bank Governor Jerome Powell stated that “the labor market is very strong, inflation is very high,” while at the same time warning that the Federal Reserve may raise interest rates by 50 basis points, or 0.5 percentage point, when the next interest rate meeting.
Watching the slack signal
Marianne Stoltenberg Lind, portfolio manager at Odin, points out that financial market players are concerned about the slope of the yield curve, because the historically inverted yield curve — that short interest rates are higher than long rates — has been a signal that a recession is waiting.
A recession is an economic slowdown, usually defined as a decline in a country’s gross domestic product for at least two consecutive quarters.
However, it must be remembered that the fixed income market has rarely been manipulated as it has been in recent years, with significant quantitative easing from many of the world’s central banks. So whether this signal has the same value as the previous one is uncertain. Plus, the Fed has good chances of raising the yield curve in the long run as well, when it starts lowering the central bank balance soon, she says.
Stoltenberg Lind believes that the Fed’s 0.25 percentage point rate increase in mid-March was exactly as expected, and that the planned pace going forward was a surprise. An increase in interest rates is now being signaled at each of the remaining six meetings in 2022, and another increase in 2023.
The director believes Powell is also keeping open the possibility of stronger monetary policy tightening, if necessary.
Quality companies, fixed income and credit funds
High energy prices and shortages of inputs and labor affect many companies, and contribute to lower production than it otherwise would have been.
Odin manager says that the demand for the goods remains high, which leads to higher prices. At the same time, it believes that higher prices, not least energy prices, will have a tightening effect on household finances, and this may lead to weaker demand in the future.
The fact that central banks are also increasing interest rates will reinforce this effect in households with loans. Stoltenberg Lind says financial markets are concerned about how these effects will affect future economic growth.
– How should investors position themselves now?
Time to market is difficult, and with a long-term investment horizon as a starting point, stocks are a natural element. Odin Forvaltning’s approach is to focus on high-quality companies with strong business models, which can perform well during a period of market turmoil.
Many companies are also in a position to pass on price increases to their customers, and they don’t necessarily come out poorly from a period of high inflation, according to the director.
She adds that some fixed income and trust funds can be good alternatives — either as part of a stock and bond portfolio, or as individual investments if you want lower risk from the stock market. If you are worried about another rise in interest rates, you should avoid long-term money, i.e. long fixed interest rates.(Terms)Copyright Dagens Næringsliv AS and/or our suppliers. We would like you to share our cases using a link that leads directly to our pages. All or part of the Content may not be copied or otherwise used with written permission or as permitted by law. For additional terms look here.
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