Market outlook March – energy crisis or buying opportunity?

Fear of AI disruption characterized the markets in February

Throughout February, however, there was fear of AI disruption (AI disruption) that created the most turbulence in the markets, in the form of large swings in individual stocks as a result of various news related to AI. While the development on the surface was good, with global stocks rising 1.2% during February (measured in local currency), there was indeed a lot of drama and significant movements "under the hood."

Thus, we see that there are four factors that have driven the markets recently:

1) fear of AI disruption,

2) solid prospects for both the real economy and corporate earnings in the coming year,

3) that investors are increasingly looking for alternatives to dollar-based investments, and

4) that there are concerns about over-investment among the large American technology companies.

These four factors also reinforce each other. AI disruption has so far tended to benefit companies involved in physical asset management, while it has negatively affected companies engaged in information management, to put it bluntly.

As companies involved in physical asset management, such as in the energy, industrial, and commodity sectors, also tend to perform well when the global economy is in an upswing, points 1) and 2) reinforce each other.

Point 3), the fact that many investors are looking for alternatives to the US as an investment destination, also seems to point in the same direction. This is because both Europe and Emerging Markets, which investors are flocking to, have more of these physically and cyclically exposed sectors than the US.

The last point, namely that many are concerned about over-investments among the large American technology companies, may also contribute to investors seeking to move away from the US and technology, which has long been the region and sector that has attracted the most capital.

We find it difficult, if not impossible, at this stage to predict which companies or sectors will be potential AI winners or losers. We prefer to take risks based on what we know, or at least what we know more about.

We have shifted the portfolios towards more cyclically exposed sectors and regions

Based on macro data, prospects for fiscal stimulus in both the US and Europe, and stable or declining interest rates in most major markets, we believe it is right to increase exposure to cyclical sectors and regions. This process started at the beginning of the year, by purchasing broad exposure to global small-cap companies (Small Caps).

In January, we bought broad exposure to Europe, in the form of a future on Stoxx600, the pan-European main index. We are keeping this, but we have recently replaced the future tracking European banks, EuroStoxx Banks, with an ETF that tracks European oil and gas companies. This is a move we have made to reduce the portfolio's vulnerability to the unrest related to the war in the Middle East potentially having a more lasting effect on the markets. In such a case, typically oil and gas would perform better, while concerns that rising energy prices could be negative for growth prospects in Europe could hit the banks. That said, Europe is not nearly as vulnerable to an energy price shock now as it was in 2022. According to Germany's Minister of Economy, Germany now gets 90% of its gas from Norway, Belgium, and the Netherlands. For now, we are comfortable having a broad overweight in European stocks.

Another move we have made in the portfolios in February is to increase exposure to the industrial sector to an overweight, while we have reduced the overweight in technology, and are now neutrally weighted in the technology sector for the first time since last spring.

A final move we have made in the last month is to increase exposure to Emerging Markets, by buying more into funds that provide broad exposure here. However, we are still neutrally weighted.

Overall, we have taken several actions in the portfolios over the last month, by reducing exposure to technology and finance, and increasing exposure to industry and energy. In other words, we have progressed in shifting the portfolios towards more cyclically exposed sectors and regions, and through that, we gain some protection against the worst nervousness related to AI disruption.

When it comes to war and other geopolitical unrest, we know from experience that this usually has limited lasting effect on financial markets. It is primarily when the economic outlook changes that it significantly affects the markets. The war in the Middle East now has the potential to do just that if disruptions in the oil and gas markets become so large and lasting that they have significant and lasting effects on inflation and industrial capacity here in the West. To the extent the war drags on and the risk of such an impact increases, we will take further actions in the portfolios.

In terms of interest rates, we have made no changes in the last month, maintaining the overweight in Nordic high yield, financed by an underweight in money market rates.