After the last two years have been dominated by high inflation and high interest rates, inflation has now come down. Central banks can direct their attention to unemployment and the real economy – in a situation where growth is slowing precariously in the big economies US, China, Japan and Germany. So, key rates will come down. The speed of rate cuts will differ; we believe that the Fed Funds rate will fall by around 2 percentage points by next year, while ECB’s key rate will be lowered less, by around 1½ percentage points. Sweden will move a little bit faster than the ECB.

The American economy is the main macro uncertainty. Historically, a large fall of the inflation rate has been followed by recessions. A number of indicators, such as the yield curve and the labour market also indicate heightened recession risks. The consensus view is still a soft landing, but we see recession risk increasing. As regards Europe, the continent is weaker and the task is rather to accomplish a slow upturn. Our view is that this indeed will happen, but that the rate of growth still will be slow.

Key rates will fall by more than indicated by the big central banks, albeit probably not as much as markets are currently pricing. Rates will not fall back all the way to where they were before the pandemic hit. The new normal is an environment with more protectionism, supply-side disturbances and green transition costs – meaning higher costs. Also, political risks abound.

A Trump victory in the US presidential election will mean a new round of tariffs and other protectionist measures, higher rates and a stronger dollar. The candidate himself has stated he prefers a weaker USD. Here looms a possible conflict between the Fed and the White House with great monetary uncertainty. A Harris presidency would entail less such risks. However, a Trump loss may unleash political mayhem if his fans refuse to accept the election outcome.

It should be noted that none of the candidates seems willing to tackle the increasing American government debt. Thus, we cannot exclude that debtors sometime in the future will demand a higher price to fund America.

Low inflation and falling interest rates should give support to property markets and stocks. However, stock market valuations are high and the strong equity performance has been largely driven by a few big tech companies. This makes equity markets sensitive, as we saw during summer as both the SKEW and the VIX indices hit extreme levels.

Bond markets should be better behaved and yield curves return to positive slopes, but also here we have seen uncommon volatility. Furthermore, stocks and bonds point in different directions. We believe that bond markets are pricing the future better than the stock market. But for a while yet, financial markets are still searching for new equilibria.

The Swedish economy has been stagnant for almost three years and is still in recession. The Riksbank will continue to cut rates. The interest rate sensitivity of households will then turn into an accelerator for growth. Tax cuts and infrastructure investment will make fiscal policy more expansionary. Private consumption will recover in 2025 and be the main driver of growth. As interest rates fall, optimism will return to the property markets. Swedish GDP will grow more rapidly than both the Euro Zone and the US in 2025.

The bottom line: Uncertainty, nervousness and herd behaviour can cause sharp volatility in financial markets. Global geopolitical risks can once again cause havoc. In this situation, we stick to our guns. We invest mainly in credit and unlisted, small tech companies with a strong cash flow. This gives us balanced risks, while sheltering us from the gyrations of the stock market.