The stock market and the summer ahead

Jonas Olavi, Equity Strategist

So far this year, the stock market has painted both a rainy and a sunny picture, and there are divided opinions about how it will perform in the summer.

Nordea’s equity strategist Jonas Olavi summarises the situation ahead of the summer on the stock market:

Stock market fundamentals actually look really good on several fronts, but there are nagging fears about Europe and the eurozone that make the situation hard to judge.

How do you think the stock market will perform in the summer?

Recent activity has featured a run of negative news, including the Chinese slowdown, Greek elections and major problems of Spanish banks. However, many stock exchanges are benefiting from the low interest rate environment and low inflationary pressure, both from wage trends and the commodities market with, for instance, falling oil prices. At the same time, valuations have dropped in line with the increased unease, and in general yields look unusually attractive. Many companies, perhaps primarily in the Nordic region, have used recent years to reduce debt, so balance sheets will be able to withstand quite a beating ahead. Most forecasters also agree that this year will be weak, but next year will be better. And, higher profits support higher share prices. So, the stage is definitely set for an upturn in the summer, despite the unease.

Which issues will affect Nordic stock markets in the summer?

In a short-term perspective, the EU summit on 28–29 June will be of primary interest. At the summit, discussions are expected about extended integration between the EMU countries and support for the banks. We also expect that the sustained crisis management of the Greek economy with forthcoming rescue loans will top the agenda. The problems in the Spanish banking sector will also get closer to some sort of solution in the summer. In a longer-term perspective, focus will turn to the US debt ceiling and upcoming presidential election. The US economy is facing many challenges, and it will be interesting to see how they are tackled.

Which stocks should be picked?

Given a more positive stock market scenario, we would see the greatest potential among the more cyclical, now under-owned stocks. These can be found in, for instance, the commodities and industrial sectors. Of course, the opposite would apply if the unsettled stock market climate continues throughout the summer. Then, we would see the greatest value in defensive sectors such as telecoms and pharmaceuticals. So a good mix is probably the best option.

What should savers think about this summer?

Attempting to maintain suitable risk diversification between different assets is important. The risk level that is most suitable depends on personal preferences. For those unable to follow developments in Europe while on holiday, having a lower proportion of shares might be most suitable. Others who can keep up with what is going on in the world might want to stick with their original distribution of assets and not miss out on potential upturns.