Interest rates down, Nasdaq Helsinki up

Stock markets continue to set new records across the board, apart from Nasdaq Helsinki.

Record dividends on the pretext of no economic growth

Europe's recession-like state of affairs may not be the first thing you associate with record shareholder payouts, but that’s the name of the game today. Dividends and share buybacks by European companies (per the MSCI Europe Index, equivalent to 85% of the value of all European equities) are now at a record level of €600 billion and are forecast to remain so for the next few years. This means a “fixed rate” of around 6% on European equities.

In particular, the banking sector, which has benefited from rising interest rates, such as Nordea at home, is transferring money to owners' bank accounts like no tomorrow. With the economy not growing but profitability at record levels for many European companies, the sensible option is to distribute the excess capital directly to owners.

Eurozone economy stabilizing or even recovering

Based on the latest Purchasing Managers' Index data, the European economy continues to stabilize. The optimist has a spring in his step and can see a recovery in the data. The monthly PMIs are a good proxy for the general economy.

The PMI for services continued above 50 in March, indicating growth relative to the previous month. The services sector is the bigger block in the economy. The long industrial downturn continues, but PMIs have been less weak month by month for some time. This anticipates the bottom for industrial companies. Business confidence in the future also rose to a 13-month high.



On the price pressures side, rapidly rising wages remain a concern, but even with inflationary pressures, companies' responses are no longer showing growth. Price increases are showing signs of abating. This is good news for investors awaiting interest rates from the ECB.

Germany, the eurozone's largest economy, is flatlining through a recession-like situation and is one of Finland's largest trading partners. According to the latest IFO survey, companies’ expectations for the future have also improved there.

 

Interest rates down, Nasdaq Helsinki up?

Speaking of rate cuts, the Swiss central bank swam against the tide and already delivered the first rate cut. The country is exceptional in many ways. Inflation is low there. The central bank is also concerned about the excessive appreciation of the Swiss franc. This is why it is a good idea to cut the policy rate well in advance of the Fed and the ECB.

Investors can expect several rate cuts from both central banks this year. However, given the strength of the US economy, interest rate cuts may be postponed. This is the argument of Shaan Raithatha senior economist at asset management giant Vanguard, for example.

Instead, the ECB in the fragile eurozone would have room for even larger-than-expected cuts. While a weakened economy flirting with recession cries out for rate cuts, the worry in this scenario would be a weakening of the euro against the dollar and a return of inflationary pressures.

This would have a twofold effect: On the one hand, households and businesses that consume imported goods would suffer from higher prices in euros. But on the other hand, export companies would benefit from improved competitiveness. For export-driven listed companies in Europe and Finland (e.g. forestry companies, industrial companies), interest rate cuts could therefore be seen as delicious.

In my last post, I showed a graph plotting the S&P 500 stock index against the market's expectation for the Fed policy rate one year ahead. This made me think of a similar parallel with the interest rate expectations of Nasdaq Helsinki and the ECB. In practice, Nasdaq Helsinki started to collapse in anticipation of interest rate rises (note: interest rates on an inverse scale). Since then, market expectations for the ECB's policy rate one year from now have remained in the 3-4% range. Similarly, Nasdaq Helsinki has been stuck in a rut and has recently moved in line with expectations for policy rates. So you can see how a clear downward trend in interest rates would be positive for the Finnish home exchange. Apparently, a watched pot never boils.



However, this train of thought is somewhat contradicted by the record highs of other European equity markets. The weak economy is affecting all European countries in one way or another, as are high interest rates. Yet the UK's FTSE 100, France's CAC 40 and Germany's DAX are climbing to record highs. There are a lot of high-quality, export-driven giants in those indices. The pessimist's interpretation is that Finnish companies are in the wrong place at the wrong time, and that the stock market's decline is primarily due to their own poor performance rather than rising interest rates. And the ECB's interest rate cuts only indirectly address this problem.