Economy instead of liquidity as the main driver


Vienna, 27 May 2013

• Eurozone’s GDP to reach growth zone in Q4, expected growth between 1 to 1.5 per cent in 2014
• Eurozone on its way out of recession
• US plans exit from share-purchase-program
• Stronger diversification for portfolio strategies
• Asset Allocation: share neutral to bonds

“Due to monetary impulses and structural reforms, as well as the absence of significant burdens such as last year’s restructuring of Greece, the Eurozone will still have a negative second quarter, but will already reach the growth zone in the fourth quarter. For 2014, an average GDP growth between 1 and 1.5 per cent and therefore further economic recovery can be expected”, says an optimistic Valentin Hofstätter, head of Bond Market & Currency Research at Raiffeisen Bank International AG (RBI), in the recent publication for the third quarter „Strategies Global Markets“. At the same time, Hofstätter emphasizes that the growth predictions for the Eurozone, as well as for the US, are based on a significant improvement of the leading indicators over the next three to four months.

According to the International Monetary Fund (IMF), the Emerging Markets (EM) are expected to have an average growth of 5.3 per cent, which once more underlines their immense impact on the international economic development. However, Helge Rechberger, head of Equity Market Analysis at Raiffeisen Research, points out that the EM equity markets have fallen behind the developed markets since October 2010 and have recently been exposed to massive sales pressure. “Both the restrictive tendencies in monetary politics and the weakening early growth indicators in China added to the losses in May“, analyzes Rechberger the reasons for the current underweighting in international portfolios.

Eurozone on its way out of recession

“After a performance lapse in early spring, the leading indicators for the Eurozone recovered in the second quarter of 2013. Our forecast regarding the economic recovery is supported by sound purchasing manager indexes“, explains Hofstätter. “Especially positive is the fact that these indexes are pointing up not only in Germany, but also in Spain, Italy and France, which recently was under a lot of pressure. The Eurozone is on its way out of recession!”

According to the experts of Raiffeisen Research, several factors lead to this economic recovery. For once, the consolidation efforts are starting to show impact and therefore the damping effect of fiscal policies are decreasing, while at the same time the EU Commission is less strict with the actual achievement of agreed deficit goals. Also, the monetary policies in many parts of the Eurozone lead to cheap financing conditions. Simultaneously, the domestic real economy imbalances, such as overheated real estate prices, among the Eurozone countries are decreasing, which in turn leads to improved international competitiveness and therefore sustainable recovery for the region.

„Overall, we are expecting growing exports to initiate private investments which will then lead to more employment and consumption in 2014“, concludes Hofstätter his outlook for the Eurozone.

US plans exit from share-purchase-program

Extraordinary low interest levels and numerous share purchase programs are currently leading to a “liquidity-driven” development of the equity markets in many established economic regions.

“In spring, discussions about an exit from the share purchase program, which is pumping about USD 85 billion of fresh money every month into the US economy, have started. Based on the assumption of an ongoing improvement of the labor markets, we expect a reduction of the liquidity boost starting from the fourth quarter”, reviews Hofstätter the latest announcements of the Federal Reserve Governors.

“However, in this context I consider an increase of interest rates in the US prior to 2015 as illusionary, given the economic risks linked to such an action”, explains Hofstätter further. He also considers a change in the ECB’s current money supply policy before spring 2014 as rather unlikely.

Impact on currency markets

Hofstätter sees an advantage for the US-Dollar over the Euro in the second half of 2013 due to higher money and capital market interest rates: “A temporary US-Dollar exchange rate of below 1.30 until year-end is therefore plausible. The most likely scenario for the Euro/Swiss Franc exchange rate until the end of the year is between 1.22 and 1.27.”

Stronger diversification for portfolio strategies

“Economic growth must get better now if the upwards trend on the established equity markets is to reestablish itself again. We expect the US to lead the way before the Eurozone and consequently also the CEE  region will follow the trend by the end of the year”, says Rechberger. “Japan has to implement actions following political announcements. We currently estimate profit growth to be at 50 per cent for the current period. However, since the current share prices have already absorbed a considerable part of these profits, a purchase at this point is not especially cheap anymore.”

Rechberger generally expects that during the transition period from liquidity-supported to growth-supported development share and bond markets will experience stronger fluctuations. “While shares will continue their upwards trend, we expect government bonds to permanently move away from their all-time high.”

Regarding industry sectors, the analysts of Raiffeisen Research are clearly aiming for a cyclical positioning and therefore recommend overweighting the sectors energy, industrial, cyclical consumer, IT and utilities.

Asset allocation: shares neutral to bonds

Raiffeisen Research weights shares neutral to bonds, with 5 per cent of alternative investments. Rechberger explains the reasons: “Government bonds have reached the bottom of low yields, which was also supported by the fact that safe-haven bonds, like US bonds or German federal bonds, started to show rising yields. The situation on the equity markets is more differentiated. Since the beginning of the year, established equity markets show reasonable performances, while at the same time shares in emerging markets are as underweighted as in 2008.”

However, the analysts of Raiffeisen Research estimate that under the current circumstances the gloomy atmosphere in the EM can be seen as a sign that the bottom will be reached soon. Further declines until the mid of the quarter might therefore open a good purchasing opportunity for long term investments.

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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 service about 14.2 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.

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Ingrid Krenn-Ditz (+43-1-71 707-6055, [email protected]) or
Anja Knass (+43-1-71 707- 5905, [email protected]),