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The stock market fluctuates more than it did in the difficult 1930s, but a Norwegian stock may produce good returns in the future.
So far this year, the main index of the Oslo Stock Exchange has dropped “only” 21 percent (see chart below), after recovering last week. It may seem like the bottom of the stock market has come, even in the US. USA There has been a significant recovery in the stock market.
IT’S GONE: But the main index on the Oslo Stock Exchange has fallen 21 percent so far this year after a grueling march.
Photo: (opposite)
But with miserable financial prospects, shouldn’t stock markets drop further? Isn’t there a danger that companies will have to drastically lower their profit expectations, of which we have seen few signs so far?
“There are two things that make the stock market more difficult to predict in the short and medium term,” Robert Næs, Chief Investment Officer at Nordea Investment Management, tells Nettavisen Økonomi.
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Looking forward
– First, the stock market is prospective. The worst concerns may well already be in the stock market. Second, the stock market is “unpredictable,” he continues.
Today we have a complete overview of most of what is happening in the world by sucking up all the information online. Still, the stock market fluctuates more than it did in the 1930s, and most people have no idea until several months later.
For example, on Monday, April 6, the US stock market. USA It returned a full annual return for a few hours of trading.
– How much do you think the stock market may fall?
– There is no crisis if a company loses a year’s profit. If we assume that 2020 will not make a profit and that 2021 will be the new 2020, the values will drop about ten percent, says Næs.
Næs has rained every time when the Oslo Stock Exchange has dropped 20 percent or more in two months.
Good in a year
– Then I find that returns have typically been somewhat weaker than normal for the next three months, but have been significantly higher in the next twelve months, says Næs. He believes that this pattern fits the current situation.
– The decrease of 20% for the Oslo Stock Exchange and slightly less than 17% for the US. USA It is decent enough. We will probably lose a year of profit, and we will probably not be complete again from January 1, 2021. Then the values will drop another 10-20 percent. On the other hand, we are used to the stock markets overreacting, he says.
Næs expects companies to present a series of bad news in the coming months. He says we see it take longer than expected to come back to life like we did last year. Then the markets can easily go down.
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Good returns
– I think, therefore, that the markets are likely to fall. On the other hand, for those who have a long time horizon, it is worth looking at the historical figures. They show that buying after a significant drop has typically produced good returns, says the rainy chief investment officer.
But for now, analysts do not appear to have assumed the consequences of the shutdown of the world economy. For example, earnings estimates for Norwegian publicly-traded companies are only down 5 percent.
– Here I have more confidence in the pessimists, and then I find a probable decrease in earnings of 68 percent. Norway’s largest company Equinor is one of the companies that could end up with a deficit in 2020, warns Næs.
And in international markets, there is the same optimism. Average expectations indicate flat earnings this year. It seems too good to be true. Because when Næs analyzes the lowest and most up-to-date estimates, he finds a 34 percent decrease globally.
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Look at the financial crisis
In the USA In the US, earnings of publicly traded companies will fall “only” by 30 percent, while in Europe estimates are down just under 50 percent. Nordea’s chief investment officer has more faith in what he experienced during the financial crisis just over ten years ago.
– Then I used the most skeptical analyst estimate per company. It worked fine that time, and I have now. There are more and more pessimists. If we listen to the pessimist during the first quarter, earnings should drop by almost one hundred percent.
– Then the companies will be lost! Ness warns.
It seems a bit strange, since January and February were almost normal months. However, there are some companies that need to list their investments in various securities. The most interesting thing is what happens in the rest of the year.
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unimaginable
And an important difference from 2009 is that. The financial crisis affected some companies more than others. However, closure in most parts of the world affects most companies. The world’s largest companies, which last year earned the equivalent of NOK 47 billion (!), Are at risk of losing money.
Just over a month ago, companies were expected to top $ 50 billion by a good margin, now there is reason to fear that large parts of their profits will disappear.
– In 2020, we will see financial figures that are probably worse than what we saw in the 1930s, but for investors, the focus should be on 2021, says Ness.
So far, so few of the publicly listed companies have issued earnings forecasts as a result of the recession. None of the really large publicly traded companies has indicated that earnings will decline in line with the bleak outlook for the market.
Difficult message
– It is true that there have been few notifications of results. The simple reason is probably that the message is difficult for companies. If they come out today, they should say that the first quarter was weak. Right now it’s much worse and they don’t know how long it will last. It is not something companies are waiting for, says Næs.
And while the earnings appear to be, or at least have been formidable, they still account for no more than a tenth of sales. During the Great Depression in the United States in the early 1930s, economic activity fell 45 percent in four years.
– Today we are in danger of a four-month decline. We are used to companies in the travel and entertainment industry, as well as those that sell cars and luxury goods that are most affected during recessions.
– When a large part of the population remains, demand stops for most products. Even some of the companies that demand their products are experiencing production or logistics problems. This means that they are affected, however, explains Næs.
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Down 30 percent
– How much can activities fall in the future?
– If we see a complete stop in the second quarter, a gradual increase in the third quarter and a further improvement in the fourth quarter, we can see a 30 percent decrease in sales, responds Næs.
Some of the so-called “winners” like Amazon are experiencing problems. Amazon also depends on the product that is manufactured and shipped home to the buyer. It has helped even the most cautious Amazon analyst cut earnings estimates by 20 percent
Companies are quick to lay off employees and cut costs, but in practice they don’t cut that fast and fast.
Beware of debt
Næs points out that there are great individual differences. A company with a lot of debt can break its neck as a result of a weak year. Other companies may have a corresponding increase in demand the following year.
– The companies came from a period of good earnings. If we assume that this recession will reduce the level of earnings by 20 percent, it will be more serious. So I find that the markets should have fallen 27 percent and not 18 percent, says Næs.
– And if uncertainty causes investors to raise the equity risk premium by 1.5 percentage points relative to interest rates, the decrease should have been as much as 40 percent. This is significantly more than the decline we’ve seen so far this year, says Næs.
Deep hole
Typically, a drop in the stock price is an excellent opportunity to buy stocks. It can be this time too. The danger, however, is that we are about to see a sudden stop that sends the economy into a deep hole. So what investors expect to happen in 2021 is not so interesting.
– In what actions should small savers invest in the future?
– Companies that are only experiencing a demand deferral and are financially sound can provide good performance going forward, says Næs, highlighting Olav Thon Eiendomsselskap here at home, as well as a number of pharmaceutical companies in the US. USA
The Olav Thon Group is also the largest shareholder in the publicly traded real estate company, with 66.3 percent of the shares. In 2013, Olav Thon donated $ 25 billion to a foundation.
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