Global economic growth is accelerating and broadening while corporate reports show both strong sales and earnings, creating good conditions for the stock market, according to SEB Private Banking’s Investment Outlook report.
The report notes that the global stock market has climbed at an impressive pace, amid very low volatility. In the fixed income market, yields seem to have bottomed out while the spread between government bond and corporate bond yields remains narrow. Thus, SEB is sticking to its positive view of global economic and earnings growth ahead.
"There are many bright spots in the world's financial markets. Political risks have diminished, economic growth is improving in a number of regions and first quarter 2017 reports provide hope for the future, since we saw earnings increases we have not experienced for many years," says Fredrik Öberg, Chief Investment Officer, SEB Private Banking.
However, Öberg optimism needs to be nuanced when valuations are on the high side and the investor community has a fair amount of risky assets in its portfolios. Also waiting around the corner are interest rate hikes by the US Federal Reserve.
Other central banks should gradually follow suit. It is also possible that the same central banks will then begin to shrink their balance sheets by not reinvesting all bond holdings as they mature.
“This would give us a mechanism that raises interest rates in the system and slows liquidity at the same time. If so, this process will occur gradually and cautiously since everyone is aware of the risk of adverse effects in a highly indebted economic system,” says the report.