Danske Bank has raised its investment outlook for stocks and lowered it for bonds, moving both to a neutral weight. According to Kaisa Kivipelto, Danske Bank’s senior strategist, the investment markets are at a turning point, presenting an opportunity for both positive and negative developments
Danske Bank recommends a neutral weighting between stocks and bonds as the bank believes that both have equal opportunities and risks. Neither appears more attractive than the other.
The increase in the neutral weight for stocks is due to the fact that the darkest clouds over the markets have disappeared. However, Kivipelto advises stock investors to be cautious about geographical diversification.
“We are overweight on emerging markets. Additionally, we continue to have a neutral weight on US and Japanese stocks. Regarding Europe, we estimate that the markets have fallen prey to overoptimism in some places,” says Kaisa Kivipelto, Danske Bank’s senior strategist.
The stock markets have risen as the worst energy crisis threats have faded away. It is now predicted that Europe will avoid a recession. However, Kivipelto notes that the energy crisis affecting the entire corporate sector has not yet been definitively overcome.
“The economic development in Europe has been better than feared, largely due to a mild winter and low energy prices. Europe is not expected to experience strong economic growth, and the risk of an increase in energy prices still exists. The US consumer, on the other hand, has been supported by a very strong labor market and savings accumulated during the pandemic, although the high level of interest rates could have been expected to restrict economic growth,” Kivipelto says.
Money market investments make a comeback
In bond investments, Danske Bank maintains its weightings. The bank favors higher-quality investment grade corporate bonds, eurozone government bonds, and short-term money market investments.
“Although there are very attractive interest rates available for emerging market loans and high-yield corporate bonds, there is a risk that risk premiums will increase in these riskier interest rate categories as growth slows from their current, very low levels. If risk premiums rise, it will lead to a decline in value,” says Kivipelto.
“Money market investments and eurozone government bonds with short maturities are overweight due to their relatively low risk profile and moderate return potential. It can be said that especially money market investments have made a thundering comeback to the investor’s toolkit,” Kivipelto adds.
Inflation in focus
One factor that determines the development of stock markets is inflation. It can lead to either weaker or stronger development than expected.
Central banks are curbing high inflation rates with interest rate hikes. So far, inflation has remained high despite the rate hikes. Interest rate hikes slow down economic growth, which directly affects corporate earnings.
“Inflation is a big question mark. If inflation does not ease and central banks continue to raise interest rates, economic development will weaken. Conversely, inflation can also decrease faster than expected, in which case interest rate hikes are not needed. We are indeed at a turning point,” says Kivipelto.