A challenging market environment requires selectivity and precision, and investors should hold back on return expectations, write SEB's experts led by Ann Grevelius in a new edition of Investment Outlook.
“There are no ‘free lunches’. Higher expected returns are always connected with higher risk-taking. Our conclusion is that selective risk-taking is preferable. Some risks are worth taking, others not,” says Ann Grevelius, global head of Investment Strategy at SEB.
Share valuations in many places are a bit strained. This is rarely the same as a clear downside for the stock market, but it still means that upside potential is limited.
Better economic activity in Europe gives some hope that when the current deadlock between weak earnings growth and low/falling yield ceases, higher earnings will gain the upper hand.
SEB’s experts forecast a similar development for global equity markets. Looking further ahead, a brighter economic development and global growth should drive corporate profits. That should provide support for equity markets, and returns should compare well to other asset classes.
Meanwhile the fixed income market offers few alternatives for those who are seeking returns. High yield corporate bonds have worked well for a long time, but the yield spreads between government bonds and corporate bonds have narrowed, and the same applies to the return potential.
Instead private equity could see gains even in the shorter term as major assets remain to be sold despite numerous exits last year. If the relatively risk-friendly climate holds, such assets will continue to be divested.