Market view August: Continued cyclical optimism and IT nervousness
This was the headline in the previous market outlook, and it fits well for August as well. Looking at the broad indices, July has been a relatively calm month in the stock market. The global index ended slightly down in local currency, but still benefits from a satisfactory backdrop for risky assets. Companies' reporting for the second quarter has also been good.
Therefore, we will not make changes to the portfolios at the beginning of August. The portfolios still have a stock allocation close to neutral. Within the equity portfolio, we are overweight in the cyclical sectors of materials and finance. This is balanced by an overweight in less cyclical stocks within the healthcare sector. We also maintain a slight overweight in technology stocks, but we are still underweight in semiconductor manufacturers. Within the fixed income portfolio, we retain the overweight in Nordic high yield, funded by an underweight in money market rates.
Semiconductors face headwinds
Although the fluctuations in the broad markets have been limited, the variations between sectors and subsegments have been significant. In our market outlook for June, we wrote among other things the following:
"Given the uncertainty related to AI and profitability in parts of the AI value chain, we think it is natural to question whether semiconductor companies can continue to increase their earnings as much as is now expected. It's not necessarily a bubble that will burst, at least not immediately, but with a strong rise in stock prices in a short time, an earnings growth that does not seem sustainable in the long term, and much uncertainty related to profitability from AI in general, we think it is sensible to reduce exposure to this part of the market."
The uncertainty manifested itself earlier than we had expected. An index of semiconductor and memory chip manufacturers (the SOX index) fell by over 20 percent in July.
The Strait of Hormuz back in focus
When many started their vacations this summer, the situation looked much brighter regarding the opening of the Strait of Hormuz. The USA and Iran had entered into a temporary ceasefire which meant that the strait would be fully reopened to commercial shipping. After this, the oil price fell to around 70 dollars per barrel, which was about 10 dollars higher than the level before the USA started bombing Iran. Therefore, we took a cautious underweight in Norwegian stocks and the energy sector.
However, the ceasefire was broken, and hostilities resumed. There is little doubt that the American president is under significant pressure to find a solution. Over the weekend, reports came that negotiations are to be resumed, and the oil price is currently at 84 dollars per barrel.
That negotiations are being resumed is positive, but also absolutely necessary. The Strait of Hormuz is effectively closed, and the world is "missing" about 10 million barrels of oil per day. At the same time, there is little evidence that demand has fallen accordingly. For example, looking at the number of flights, there are few signs of decline. Oil reserves have thus far helped to balance supply and demand, but this cannot last forever. It is therefore important that the Strait of Hormuz is reopened to shipping again.
The macro picture continues to support stocks
Although we still see challenges related to parts of the technology sector and the renewed conflict between the USA and Iran, there has also been positive news in July. The macroeconomic backdrop remains good, whether we look at hard data such as consumption and unemployment or confidence indicators among business leaders. This acts as an anchor for the stock market.
Reporting for the second quarter is also well underway. In the USA, over half of the companies have released their figures, and the impression is generally satisfactory.
Inflation on the way down, but interest rates remain high
In June, we saw that prices in the USA, measured by core inflation in the consumer price index, fell for the first time since the pandemic. This is of course positive. It may be that the effect of tariffs is largely already priced in, but it is too early to conclude whether this represents a new trend or just temporary fluctuations.
American interest rates have so far not reacted significantly to the inflation figures. At the same time, the rising oil price pulls in the opposite direction, making it difficult to assess the isolated effects.
The Fed did not convince the market
The American central bank (the Fed), with a new leader at the helm, also held a rate meeting at the end of July. The new central bank governor, Kevin Warsh, also failed to convince the market. He emphasized the importance of bringing down inflation, but did not address possible interest rate hikes or expectations for further price developments. The American bond market therefore reacted with higher interest rates after the meeting.
Looking at the American ten-year yield, it has been relatively stable in recent years, but is now in the upper part of the range it has traded within. If the oil price comes down again and the effects of tariffs are largely already priced in, we do not foresee a significant further rise in interest rates.
Matrix
