Economic recovery reshuffles the cards


Vienna, 26 September 2013

  • GDP forecasts for 2013 and 2014 upgraded – growth differences within the Eurozone decline
  • Yield trend reverses in the US and the Eurozone
  • Emerging Markets Bonds: recovery after sell-off
  • Good environment for stock investments
  • Asset Allocation: higher weighting of equity segment

“On the whole, our assumptions of the most recent months were confirmed. The global excess of liquidity becomes less important, as capital markets focus on the growth momentum. As the leading indicators signalized correctly, the improvement in sentiment registered since the second quarter has started to translate into better growth data as well. With an eye to this, we have also upgraded our GDP forecasts for the Eurozone for 2013 and 2014“, starts Valentin Hofstätter, head of Bond Market & Currency Research at Raiffeisen Bank International AG (RBI), his outlook in the recent publication for the fourth quarter „Financial Markets Global Strategy“. Hofstätter expects that over the next four to six quarters the difference in growth amongst the core Eurozone countries around Germany and the peripheral countries will decline. Even problem countries such as Spain, Portugal and Italy, but also France, should return to a path of modest economic growth.

“Following a setback in the third quarter due to one-off effects from the spring, our baseline scenario envisages a modest acceleration of growth until end-2014. This projection is based on the still supportive impact of the historically low interest rates, the structural measures which have been launched, fading pressures from fiscal policy-related problems and the global improvement in world trade. We expect this economic upturn to reach a peak in early 2015, and consequently the GDP forecasts for that year should be higher than the long-term averages,” continues Hofstätter.

Yield trend reverses in the US and the Eurozone

Despite the Fed’s surprising announcement to postpone the reduction of its bond-purchase-program, it is only a matter of time when the change will be implemented. Currently Raiffeisen Research’s analysts expect the reduction for December and believe that there will be a shift to rising key rates as early as by the end of 2014, due to a more positive development of the unemployment rate and the GDP growth. Hofstätter assumes that the European Central Bank will for now hold back an increase of interest rates, but will probably react to the normalization tendencies in the crisis countries and start gradually increasing its main refinancing rate by 2015.

For Hofstätter the relatively small difference in yields between the US and Germany will continue to be a compass needle for trends in EUR/USD in the quarters to come. “Currently the US dollar seems to be too cheap and we expect the rate to settle at around 1.30 until the autumn of 2014. The easing of tensions in the Eurozone suggests a marginal weakening of CHF to between 1.23 and 1.28.”

Hofstätter expects the steep increase of bond yields in the US and Germany, which was observed over the last couple of months, will only temporarily be put on hold. The stronger economic growth and the prospective of an increase of the key rates will lead to another increase of yields in Europe and the US over the next year. Hence long-term periods should still be avoided due to the foreseeable (further) retreat of prices. This also applies for long-term corporate bonds. Because of the already quite low risk surcharges short and middle-term periods should be preferred. Hofstätter still sees some leeway left in terms of the yield differentials to the peripheral countries.

Emerging Markets Bonds: recovery after sell-off

A number of Emerging Markets (EM), that recently faced a strong pressure for currency devaluation, is showing a more mixed growth performance. “Although we are still nowhere near the crisis from the 90ies, we still have some countries like India or Brazil that need to introduce sustainable structural reforms in order to retain their growth potential,” opens Veronika Lammer, head of Quant Research & Emerging Markets at Raiffeisen Research, her outlook for the Emerging Markets. “China once more stands out, as it managed to stabilize its exports and growth with focused stimulus measures. In addition, structural adjustments like for example the reduction of overcapacities are implemented.”

Emerging Markets bonds from countries with current account problems and high short-term refinancing demand, like for example Turkey, South Africa and India, will continue in 2014 to be vulnerable to currency volatility. After the strong devaluation during the last weeks most of these currencies are now showing potential for a recovery. “Generally speaking, we stay with our hold recommendation for EM local currency funds, as the high yield surplus and the revised exchange rate level with a tendency for increasing interest rates show a better performance outlook than hard currency bonds,” analyses Lammer further.

Good environment for stock investments

“Currently we have a good environment for stock investments. All large economies have entered the growth zone and are still supported by the interest levels. Especially the European stocks show potential in their revenue and price development,” opens Lammer her outlook on the capital markets. In this environment Raiffeisen Research’s analysts are generally evaluating the cyclical sectors industry, IT and cyclical consumption as favorites.

Outside of Europe the analysts of Raiffeisen Research recommend the EM stock markets in China, India and Brazil for buy. “The Chinese HSCE Index managed to overcome its low in June and gained about 20 percent. With a PER at 8.4 and an expected earnings growth of 12.1 percent for 2013 we continue to rate it as attractive,” highlights Lammer the stock markets of the PRC. “Indian and Brazilian companies should benefit from the low exchange rates in the medium-term, as they have positive effects on their competitiveness on the global markets,” continues Lammer.

Asset Allocation: higher weighting of equity segment

Lammer sees the performance outlook in the bond sector regarding rising yields of 10-year government bonds rather gloomy. Over the long term, volatility in the high-yield segment is also expected to be higher and this results in a less beneficial revenue-to-risk-ration for bonds.

“Hence we increase our weighting of the equity segment in the portfolio by 5 percentage points. In addition we keep the ad-mix of 5 percentage points of alternative investments (real estate),” concludes Lammer her explanations of the investment strategy.

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Raiffeisen Bank International AG (RBI) regards both Austria, where it is a leading corporate and investment bank, and Central and Eastern Europe (CEE) as its home market. In CEE, RBI operates an extensive network of subsidiary banks, leasing companies and a range of other specialised financial service providers in 17 markets.

RBI is the only Austrian bank with a presence in both the world's financial centres and in Asia, the group's further geographical area of focus.

In total, around 59,000 employees serve over 14.3 million customers through more than 3,000 business outlets, the great majority of which are located in CEE.

RBI is a fully consolidated subsidiary of Raiffeisen Zentralbank Österreich AG (RZB). RZB indirectly owns around 78.5 per cent of the common stock, the remainder is in free float. RBI's shares are listed on the Vienna Stock Exchange. RZB is the central institution of the Austrian Raiffeisen Banking Group, the country's largest banking group, and serves as the head office of the entire RZB Group, including RBI.

For further information please contact
Ingrid Krenn-Ditz (+43-1-71 707-6055, [email protected]) or
Anja Knass (+43-1-71 707- 5905,  [email protected]).,