By Founding Chief Executive Officer (CEO) of Lundgreen’s Capital, Peter Lundgreen
Teaser: Large European corporations are very optimistic about the future, though other components may continue to keep investors nervous.
With great interest, I have been looking forward to the many data releases concerning the expectations of European companies for the future. Most of the surveys were published earlier this week and they show that large companies have optimistic expectations for the future, when everything re-opens after the Covid-19 lockdowns. German companies’ assessment of the current situation, which is on its way back to the level that it was before the Covid-19 crisis broke out in 2020. Even more remarkable are the expectations for the future, which are even higher, and higher than what economists expected the survey to show. Overall, I believe that it fits into the global picture of optimism that is linked to the opening of the world again- this economic fundamental force I weigh with great importance in my assessment of the stock market.
The new steps which ease the lockdowns in many European countries should please investors, but the situation instead is that the nervousness in the financial markets has increased over the last few weeks and some investors now even fear a downturn in the stock market.
It is inflation that has taken the limelight, despite ordinary price increases not having been a theme since the global financial crisis. However, I only believe that inflation poses a risk when it becomes so high, it leads to capital flight, which is not a risk in the foreseeable future.
Inflation will rise for the rest of the year, and I continue to believe that it represents a threat to the bond market, as well as real estate investments, rather than to the stock market. I argue that the reason for the higher inflation can be explained, and as long as that is the case, I am less worried. Should equity investors become seriously afraid of inflation, it should be combined with decreasing economic growth, such as stagflation, which is not a risk in the next 24 months.
I am aware that a major part of the stock market looks expensive, which is a consequence of the negative real interest rates that some central banks have provoked. However, I consider the bond market to be even more expensive, and it’s where my concern is.
Back to the stock market, one could argue that the growth optimism I initially described was already priced in the share prices last year, which is correct. As the Covid-19 crisis drags on, this may mean that a correction in the market is justified, but definitely just a correction.
If one digs deeper on the optimism of the large business corporations, one will find areas that can challenge investors, thus increasing nervousness. It is still unknown how life will be like after the crisis, so there will be up and down adjustments in expectations concerning different business sectors. One example I still find that many are optimistic about is tourism, but right now, the sector is standing still in many countries, and realistically, it will be in 2022 or 2023 before that sector is back at full speed.
My main worry remains with the small and medium-sized enterprises, which is a global threat, but more distinctively so in Europe. Regarding the European labour market, it is in my view, quite uncertain how large the real unemployment rate really is.
All of these different uncertainties are complex to include in the pricing of the stock markets, and here I see a challenge for investors. I expect this kind of uncertainty to lead to higher fluctuations in the stock markets this year, but not necessarily to a downturn in the market.
These considerations remain straightforward. It is an inflation argument versus economic growth combined with other uncertainties, and these are certainly all of great importance, but still within the regular field of discussion. Though everything, including the current pricing of stocks, is based on the premise that the world will gain control of the virus around summertime this year.
But what if the virus continues to mutate so rapidly, that the entire world population needs a new vaccination against a mutation of the virus on an ongoing basis? This is far from my primary scenario, and on the contrary, I expect that in 2023, there will be medicine that can cure a Covid-19 infection. I mentioned this example because the valuation of the global stock market is currently based on one single premise, that the virus comes under control. If this risk should be converted into a risk scale, then this kind of risk is of a completely different calibre than the risk of a slightly higher inflation later this year.
