Nordea Private Banking Investment Review

The firmest support for share prices this year has come from steadily improving corporate earnings. Artificial intelligence and the technology giants still dominate the headlines, but profit growth has spread out across almost every sector. Investors have also constantly scrutinised the economics of large AI projects, contributing to sharp swings in technology shares. Despite the rally, current valuations suggest considerable scepticism about the sector’s long-term growth. That offers a solid buffer if expectations weaken—and meaningful upside if AI delivers even part of its promised productivity gains.

Economic growth has slowed from its early-year pace, particularly in the United States. Even so, consumer spending and labour markets remain reasonably resilient, while Europe has performed better than feared. The global economy therefore appears strong enough to sustain further earnings growth.

Higher interest rates and volatile energy prices increase uncertainty. Higher yields can restrain equity valuations, but they have also made the return outlook for bonds more attractive. The outlook for equities has improved too: earnings expectations have risen faster than share prices, bringing valuations down. Investors now face better return prospects across asset classes, although we still believe equities offer the most attractive opportunity.

Investors should not expect equity prices to rise in a straight line. Volatility is part of investing, even in a bull market. But robust earnings, good economic growth and improving return prospects continue to favour equities. We therefore maintain our equity overweight. For clients seeking broad exposure to global stock markets, Nordea Global Enhanced* is one example of a diversified fund option.

Technology sector volatility eases

The volatility that shook technology stocks in July subsided in August, and equity markets continued on a slight upward trend. The share prices of semiconductor companies remain well below their June peaks, and strong earnings growth has brought valuation multiples down to more attractive levels this year. This reflects concerns about the sustainability of the companies’ record-high pricing power. For example, memory chip manufacturers are currently achieving sales margins close to 80%, a level that is unlikely to be maintained indefinitely. Robust volume growth continues to support the sector’s outlook for this year and next, but the threat that Chinese competition poses to pricing in the longer term should not be underestimated.

Within the technology sector, there has been somewhat of a shift to larger, more stable companies in recent weeks. Demand for leveraged ETFs focused on individual technology stocks has declined, suggesting that speculative positions are being unwound. This can be seen as a welcome development, potentially signalling less extreme share price volatility.

The media debate over an AI bubble continues, and there is still uncertainty over the ultimate profitability of the substantial investments being made in data centres. The broader benefits of AI for society, however, are becoming increasingly prominent as AI-powered applications gain more traction among both businesses and households. More affordable AI models developed by Chinese companies have also gained popularity in the US and Europe, helping to reduce the cost of using AI and making the technology more accessible to smaller businesses.

Emerging markets kept in overweight

In our regional recommendations, we are keeping the emerging equity markets overweight. Earnings growth forecasts for the region have again been revised upwards, with earnings now expected to grow by as much as 70% this year. This strong growth is largely explained by the robust performance of South Korean and Taiwanese semiconductor companies, although performance has been broadly positive across other Asian markets as well. In the Brazilian equity market, investor attention has increasingly turned to the presidential election in October, where incumbent left-wing President Lula da Silva faces far-right candidate Flavio Bolsonaro. The markets are hoping for a Bolsonaro victory, and the Brazilian equity market is currently moving largely in line with the latest polling results. Among Nordea funds, the Nordea Emerging Market Equities Fund*, for example, offers broad exposure to the emerging equity markets.

We continue to underweight European equities due to slower earnings growth compared with other regions. However, economic data released over the summer has generally been stronger than expected, and higher energy prices have not weighed on European economic growth as heavily as feared. Further evidence of the improving economic backdrop came from the second-quarter earnings season, which significantly exceeded expectations. European companies reported revenue growth of 11% year-on-year, while earnings increased by as much as 24%. Similar earnings growth is also expected in the second half of the year, and following a strong start to the year, these ambitious growth forecasts now appear more realistic than before. That said, the crisis in the Middle East has not yet been resolved, and as winter approaches, the price of liquefied natural gas, in particular, could rise. However, a return to the extreme price levels seen in 2022 appears unlikely.

Figure: Economic data from the eurozone exceeded economists’ expectations over the summer. This is reflected in a sharp upward turn in Citibank’s Economic Surprise Index for the eurozone.

In our global sector recommendations, we continue to overweight technology, financials and industrials. The outlook for the financial sector remains positive in both Europe and the US, as rising investment activity is boosting demand for loans, while investment banking and asset management continue to perform strongly. Manufacturing companies are benefiting from healthy order growth, supported by ongoing investment in defence, infrastructure and the energy transition. Consumer staples remain underweight.

The Finnish economy has finally returned to broad-based growth, driven by private consumption and industry. The outlook continued to improve over the summer despite rising interest rates and energy prices linked to the Middle East crisis. Orders and output in the export sector have been on a nice upward trend over the past year. In particular, orders have grown strongly in the engineering, technology and defence industries, which supports the growth outlook for goods exports.

Finnish consumer confidence continued to improve in August and has now returned to its long-term average level. Assessments of households’ current financial situation and Finland’s economic outlook strengthened, while expectations regarding personal finances remained close to the long-term average. However, higher fuel prices and higher interest rates due to the war in Iran are likely to somewhat slow growth in purchasing power. Nevertheless, card transaction data from the summer suggests that private consumption has remained resilient despite these headwinds.

Despite the crisis in the Middle East, the outlook for manufacturing, a key sector on the Helsinki Stock Exchange, has continued to improve in both Europe and the US. Signs of a pick-up in the economy have led to positive price performance so far this year. In particular, equities related to industrials, energy and artificial intelligence have performed strongly. Encouraging messages from the second-quarter earnings season have helped the equity market maintain its upward trajectory.

Among the large caps, Neste, Nokian Tyres and Hiab saw the biggest upward revisions to their earnings forecasts over the past three months. Measured year-to-date, the weakest returns have been recorded by Lumo, which is suffering from rising interest rates, as well as by Kone and Kemira. By contrast, the strongest performers at the end of August were Nokia, Neste and Nokian Tyres, which benefited from the energy and artificial intelligence themes.

Encouraging messages from the earnings season for industrial companies

During the second-quarter earnings season, investors focused on companies’ messages regarding the impact of the Middle East crisis on their outlook this year and the impact of the current economic cycle on future business growth. Overall, the figures reported in the earnings season were almost as anticipated, yet some companies naturally diverged from the rest. Expectations for earnings growth this year and in the years ahead remained stable throughout the reporting season.

Helsinki Stock Exchange valuations slightly above historical averages

Following the strong rally seen earlier this year, valuations on the Helsinki Stock Exchange are now slightly above their historical average. The anticipated recovery of the economy and especially manufacturing in Europe is set to underpin earnings growth prospects on the Helsinki Stock Exchange. Current valuation levels do not appear concerning, but as always, investors should seek a balance between cyclical and more defensive companies when picking stocks.

Long-term yields reached multi-year highs

The rise in long-term government bond yields was the dominant theme in bond markets over the summer. In the United States, the 30-year Treasury yield climbed to its highest level since 2007, as rising oil prices and inflation concerns increased investor uncertainty. Yields also rose markedly in the euro area. Germany’s 10-year government bond yield reached 3.3%, while the corresponding French yield rose to its highest level in almost two decades.

Picture: Interest rates rose in the summer. The German 10-year interest rate has risen to 3.3 percent and the US 10-year interest rate to 4.7 percent.

Several factors contributed to the rise in yields. In addition to inflationary pressures, markets had to absorb governments’ substantial financing needs and increased corporate borrowing. In particular, the technology sector’s sizeable investment in artificial intelligence infrastructure has increased demand for debt financing and intensified competition for investors’ capital. When a large volume of new bonds is issued at the same time, investors demand higher yields, pushing market rates upwards.

Markets were calmed in the second half of August by the US Treasury’s decision to expand its government bond buyback programme. The measure improved market liquidity and temporarily eased pressure on bond markets. Although yields declined slightly from their summer peaks, the broader picture remains challenging, as inflationary pressures and rising debt levels continue to keep interest rates elevated.

Central banks balance growth and inflation risks

Central bank decisions will be closely watched in bond markets this autumn. In the United States, investors are assessing the policy stance and approach of the Federal Reserve’s new Chair, Kevin Warsh. Although expectations of imminent rate increases have eased somewhat, markets expect long-term yields to remain high for an extended period. Under Warsh, the Fed’s communication has become less predictable, which may add to volatility in bond markets.

The European Central Bank faces a difficult situation in the euro area. Economic growth is gaining momentum, while risks related to energy prices are adding to inflationary pressure. The ECB kept its deposit rate at 2.25% in July, and many investors expect it to raise its policy rate at the September meeting. Euribor rates have moved higher amid the conflict in the Middle East, and markets expect them to remain elevated next year.

Corporate bond yields are high, but spreads remain tight

The corporate bond market presents a mixed picture. On the one hand, the higher interest rate environment has lifted the running yield on corporate bonds to highly attractive levels. On the other hand,

strong corporate earnings have compressed credit spreads to historically tight levels. The outlook for high quality investment grade corporate bonds remains relatively stable. Corporate balance sheets are generally sound, and investor demand for high quality fixed income assets remains strong. Unless the economic growth outlook changes materially, credit spreads are likely to remain broadly stable. Default rates among high yield issuers are expected to remain moderate in the coming months. Higher interest rates and tighter financing conditions are the main risks to funding access for lower rated companies.

Higher yields improve long-term return prospects

The past year has been challenging for bond investors, as rising yields have reduced the market value of existing bonds. At the same time, however, this increase in yields has significantly improved prospective returns. The running yield available on new bond investments is now at its highest level in almost two decades, providing a stronger starting point for the years ahead. Within fixed income, we recommend a neutral allocation across all bond categories. Among Nordea’s funds, Saving Fixed Income* provides diversified exposure to bond markets. Money market investments are underweight in our investment view. 

Asset classes

Equity markets

Bond markets

Returns by asset class

Asset class returns for the past 12 months: Global equities 22,6 %, Global high yield bonds 3,1 %, Eurozone corporate bonds 1,0 %, Eurozone government bonds 0,0 %.

Asset class returns for the past 12 months: North America 20,3 %, Europe 21,2 %, Japan 27,9 %, Emerging markets 38,1 %, Finland 30,0 %.

Responsible editor
Antti Saari, Wealth Management, Nordea Bank Abp
antti.saari@nordea.com

Content production
Hertta Alava, Ville Korhonen, Antti Saari, Teemu Mäkelä

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Investment services are provided by Nordea Bank Abp. The issuer of the products described in this message is Nordea Funds Oy. The information provided in this message is intended as general product information only. This information is not an exhaustive description of the products or the risks related to them and does not constitute investment advice or recommendations. Remember that investing always involves risks. The return on your investment may fluctuate, and you may lose some or all of your capital. Past performance is not a guarantee of future results. Before making any investment decisions, you should read the relevant prospectus and key investor information documents for more details about the investment product.

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