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Temptations and dangers this summer

25.05.2015

If growth in the US economy picks up, it can lead to a summer party on the stock exchange. Conversely, a Greek bankruptcy could trigger a correction.

According to the Greek Prime Minister, Greece is close to a deal with its creditors. However, he has been saying this for months.

According to reports from the opposite side of the negotiating table there has been little tangible progress except for an improved weather.

Greece will probably reach a deal, but for every day that passes without an agreement, the likelihood of a negative outcome increases. If Greece goes bankrupt, it can sour the summer mood on the stock exchanges and trigger a correction.

Size and duration of such a downturn is difficult to predict. Much depends on whether the unrest spreads to other indebted Eurozone countries.

Will the US kick start the markets?

On the positive side there is the possibility for an acceleration of the US economy over the summer. While growth in the Eurozone is good, the start of the year has been disappointing in the US. One important reason is that households have used reduced gasoline costs to increase savings.

With a good labor market and strong optimism we expect that the low desire to shop is temporary and that the economy accelerates during the summer. In that case, economic uncertainty will be reduced, which can lead to a rally on the stock exchange.

The OPEC meeting in two weeks is another important event. The outcome of this is not only crucial for oil-related stocks. This will also affect financial markets in general through the impact of oil price on inflation and thus interest rates.

Interest rates and stock exchanges

Rising interest rates caused by higher growth is usually nothing to worry about. The reason is that headwinds from increased interest rates are usually offset by better corporate results.

In contrast if the interest rates rise because of higher inflation, this is always negative for the stock markets. Remember that in this regard the interest rate sensitivity of stocks is basically in line with long-term bonds.

In early May, 30-year German government bonds fell by 20 percent in value within two weeks. This dramatic drop was due to a rise in 30-year interest rate from 0.47 to 1.39 percent.

The DAX index fell by nine percent during the same period. This decline reflects that the rise in interest rates, at least in part were driven by increased price pressures caused by the oil rally.

Cheap shipping company

This week we include the car carrier shipping company Wilh. Wilhelmsen ASA into the Dovre portfolio. On the positive side we see a strong first quarter, a positive outlook for car sales and a low valuation.

The 2015 P/E is around seven, but this figure is halved if we adjust the value for Glovis stake. The main risk is the unpredictable outcome of the ongoing antitrust case.

Dovre portfolio

  • Kongsberg Automotive
  • Nordic Nanovector
  • Marine Harvest
  • Aqua Bio Technology
  • Noreco
  • Wilh. Wilhelmsen ASA

In: Wilh. Wilhelmsen ASA

Out: Avance Gas