European debt crisis dominates global markets


  • GDP growth forecast in eurozone lowered to 0.2 per cent for 2012:
  • Risk of recession in eurozone remains high
  • Inflation falls to well below 2 per cent
  • Growth in emerging markets slowed by European debt crisis
  • Asset allocation: Overweighting of defensive sectors recommended
  • Gold price to continue rising in environment of high uncertainty

“The extreme unrest in the banking sector, the falls on financial markets and the escalation of the debt issue are awakening associations with autumn 2008 and Lehman. We are working on the assumption that the issue of Greece will remain a driving element in the coming months,” explains Valentin Hofstätter, research expert at Raiffeisen Bank International AG (RBI). “The identifiable tensions in the financial sector, the cooling sentiment globally and a possible restructuring of Greece’s debt are slamming the brakes on growth.” Hofstätter therefore even expects temporary falls in GDP in the eurozone, which should then return to positive figures in the second half of 2012.

“Emerging markets are not protected from the downturn in economic activity in the developed countries either. Here, too, we are expecting a weakening in GDP figures – although by nowhere near as much as in the eurozone and the USA,” says research expert Veronika Lammer. “The outlook for gold remains positive in light of high risk aversion and negative real interest rates,” says Lammer.

Weaker economic activity in the eurozone

Given the latest fall in major sentiment indicators and the ongoing burden caused by the debt crisis, the analysts of Raiffeisen Research are expecting a marked dampening in the outlook for economic activity in the eurozone. “The full weakness of economic activity will only reveal itself in the second half of this year, when we expect most countries to show a drop in production output. We are therefore reducing our GDP growth forecast for 2011 to 1.6 per cent,” says Hofstätter. In the analyst’s opinion, the economic slowdown, which will also be felt in 2012, will, together with an expected default in Greece, give rise to uncertainty. He therefore expects GDP growth of just 0.2 per cent in 2012.

Inflation remains a strongly felt and real problem in most countries. “While everyday consumer goods, such as food and fuel, are posting stronger price increases, the increased transport costs and food prices are not feeding through into an equally strong rise in the price of other classes of goods,” explains the RBI analyst. He expects an inflation rate of just 1.6 per cent for 2011.

Debt crisis in the eurozone: Disbursement of the next loan instalment for Greece expected in the fourth quarter

Hofstätter believes that the lack of a credible model for solving the debt crisis is the main reason for the continuing unchecked downward spiral in the eurozone. “If the EU’s politicians do not present credible alternatives in this area soon, there will be no lasting improvement in confidence,” says the expert from Raiffeisen Research. “For the fourth quarter, we are expecting disbursement of the next loan instalment to Greece, the approval of the second aid package for Greece and the scheduled implementation of the Greek debt restructuring programme.” However, in view of the numerous obstacles that have to be overcome by then and the probably even longer-lasting clamour for a long-term solution to the debt crisis, Hofstätter believes that uncertainty on the markets will remain high.

GDP growth of 1.7 per cent expected for the USA in 2011

The RBI analysts expect GDP growth in the USA of 1.7 per cent for 2011. However, the outlook for 2012 has dimmed again. “The ongoing quarrelling over how to deal with the sovereign debt crisis in the eurozone and the sharp rise in the likelihood of further debt restructuring in Greece have given us cause to reduce our GDP forecast for next year from 2 per cent to 1.5 per cent,” explains Hofstätter. “We have only refrained from an even sharper revision due to the new stimulus programme worth around USD 450 billion.”

ECB breaks cycle of interest rate rises – key interest rate held at 1.5 per cent

Given easing inflationary risks combined with increasing economic risks, the experts at Raiffeisen Research are expecting the ECB to break its cycle of interest rate rises and to leave the key interest rate unchanged at 1.5 per cent. With an arranged rescheduling of Greece’s debt, the downward risks to economic activity in particular would become perilous and further increase nervousness on the interbank market. “In response, the ECB could lower its key interest rate to 1 per cent again,” anticipates Hofstätter.

EUR/USD: 1.20 possible at beginning of 2012

“The EUR/USD exchange rate has already reached our old December target of 1.35 in light of current uncertainties. However, the low point may not yet have been reached. With what we ultimately consider to be the unavoidable restructuring of Greek debt, the euro could fall to a rate of 1.20 EUR/USD in early 2012,” explains Hofstätter.

EUR/CHF: Levels below 1.20 unlikely

As Switzerland does not currently have a problem with inflation, RBI analysts are working on the assumption that the Swiss National Bank (SNB) will itself provide the necessary volumes in the event that the euro debt crisis deteriorates, in order to prevent EUR/CHF from sliding below 1.20. Only existential problems of the eurozone together with a massive expansion of CHF liquidity to defend the 1.20 level could jeopardise the exchange rate peg.

German bonds as a safe haven

The bond market in the eurozone also remains dominated by the topic of sovereign debt. “But although German bond yields are already at recession level, their function as a safe haven should be extended at least until the middle of 2012, due to the still unresolved debt problem,” analyses Hofstätter. In the event of a possible default by Greece in the first quarter of 2012, he even anticipates a new temporary low for German yields.

Share and corporate bond prices continue to fall

“Although recovery phases meanwhile include the high-risk asset investment categories, the period to spring 2012 will be characterised by steadily falling stock and corporate bond prices,” analyses Lammer. She anticipates that massive downward profit revisions for 2012 and recessive tendencies until the middle of 2012 will encumber these forms of investment, despite already advanced downward trends. “Ample liquidity provision in conjunction with the waning risks of contagion through the implementation of convincing restructuring concepts should lead key economic indicators out of the trough of recession in 2012. That would be an occasion to expect a shift in trend towards the positive for riskier investment categories such as shares and corporate bonds,” explains the expert. Lammer is working on the assumption that both eurozone and US shares as well as the shares of non-euro countries will continue to come under pressure in the coming months.

In the emerging markets (EM), the economic picture is better, but a weakening in growth is expected, on the one hand due to lower exports to the developed countries, and on the other due to higher interest rates in some countries. “Stock markets have fallen in line with the developed markets, and should be able to weather events better, due to the low level of indebtedness and the more advantageous long-term outlook for growth. However, it’s too early to sound the all-clear,” says Lammer. EM currencies have recently come under such selling pressure against a backdrop of extreme risk aversion that they could already be of interest again to speculative investors.

Asset allocation: Underweighting of highly risky asset classes

Lammer recommends underweighting high-risk investment classes, which will suffer from high risk aversion again in the fourth quarter: “On the one hand by underweighting shares by three percentage points, on the other by underweighting risky bond categories. This mix takes the cheap valuations of individual asset classes into account and at the same time cushions the high volatility through an overweighting of government bonds and investments in US dollars. The US dollar is tending to appreciate against the euro in phases of increasing risk aversion, which is why an overweighting represents a good hedge for the accepted share risk,” says Lammer.

The euro debt crisis has already caused the price of gold to touch a new all-time high of 1,900 US dollars per ounce. “This enormous and rapid price rise is mainly due to investors fleeing to safer investment classes. The latest correction offers another opportunity to join in. Our forecast model, which is based on fundamentals, indicates a rise in the gold price to 2,200 US dollars by the end of 2012,” says Lammer. Particular drivers of this model are real interest rates, which are forecast to remain negative. From a macroeconomic perspective, a low real interest level and a weaker trade-weighted US dollar are two essential prerequisites for rising gold prices. “Both the announcement by the Fed that it does not want to raise interest rates for an extended period of time and the expectation of falling interest rates in the eurozone confirm our ongoing positive outlook for gold,” analyses Lammer.

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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 60,000 employees service about 13.5 million customers through around 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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