The month of May began on a positive note with the global equity markets encouraged by a decrease to market rates in conjunction with lower concerns about inflation. Market performance was more sideways at the end of the month due to mixed economic data that created uncertainty about inflation growth and upcoming cuts to interest rates, particularly in the US. Performance in the Nordic stock markets was positive, with small caps outperforming large caps, which was favorable for the portfolio’s overweight in small caps. Investments in real estate also contributed positively, while the exposure to high-quality companies lagged.
The SEK strengthened, most notably against the USD, which had a negative impact on the portfolio’s foreign investments. At the same time, the overweight in Swedish equities was positive for the portfolio’s relative performance in the period.
Interest rates fell initially in the fixed income market. The market encountered volatility at the end of May as a result of the mixed signals in economic data, which increased uncertainty about inflation and the actions of the central banks during the year. As expected, the Riksbank cut the repo rate and the market is also expecting rate cuts by the European Central Bank. The US central bank is not expected to cut its key rate until after the summer. Lower interest rates were positive for the fixed income holdings, with credits posting the most strength. Emerging market bonds posted negative performance as the strong SEK had a negative impact on these holdings. A softer monetary policy, together with a slower rate of inflation in Sweden, can increase risk sentiment in the market and thereby support additional positive performance in the equity market.
We are maintaining our positive outlook on risk assets and expect the rate of inflation to continue to move towards the inflation target, while economic growth appears to be trending upwards. As a result, we expect to see higher corporate earnings going forward. We see the greatest potential in high-quality companies, small caps, companies within digitalization and real estate companies. Within the fixed income holdings we prefer corporate bonds. Lastly, we are retaining an overweight in equities and are continuing to invest in new global equity funds that provide a beneficial diversification within the global equity portfolio.