Global markets: business optimism dampened by disaster in Japan and developments in the Arab world


  • GDP growth of 1.8 per cent in the eurozone
  • Further rise in the oil price could have negative consequences for recovery
  • Moderately positive economic outlook for the USA
  • Inflation will continue to rise until the summer
  • Japan stock exchange overshadowed by disaster
  • ECB interest rate rise puts bond markets under pressure and justifies overweighting of shares in the asset allocation

“Just as the global economy starts to enjoy a significant recovery in growth, the terrible events in Japan and recent developments in the Arab world present risks to a stable economic development in the eurozone,” says Valentin Hofstätter, research expert at Raiffeisen Bank International AG (RBI). Hofstätter therefore remains somewhat cautious in his forecast for 2011 and expects GDP growth of 1.8 per cent for the eurozone.

“The long-term potential of the growth markets is still intact. The correction of the past six months has made these countries attractive again,” explains research expert Veronika Lammer. The desired calming of occasionally exuberant economic growth seems to be succeeding in most economies. Lammer is working on the assumption that both the stock markets as well as some bond markets will reward this with price rises.

Varying levels of economic recovery in the eurozone

The analysts at Raiffeisen Research continue to expect that the pace of economic recovery will vary across the eurozone. “While exporting countries such as Germany, the Netherlands, Finland and Austria are benefiting in full from the robust global economic upturn, countries such as Spain and Ireland are struggling from the affects of burst property bubbles and accelerated budget consolidation,” explains Hofstätter. In addition, the early phase of the recovery would suffer numerous simultaneous shocks like never before: “The direct impact of the disaster in Japan will probably have a minor dampening effect on growth, but could also have a negative psychological impact on the eurozone, such as the postponement of investments and consumption,” says Hofstätter. However, the biggest risk to economic activity, according to the analysts, lies in any further rise in the price of oil, due to ongoing upheavals in the Arab world. Furthermore, the financial crisis has generally not been fully digested everywhere, and budget consolidations will continue to be unavoidable throughout the eurozone, as most recently seen in Portugal.

USA: economy still withstanding the headwind

The research experts continue to forecast a moderately positive outlook for economic activity in the USA, but on the assumption that risks will continue to increase. “We still feel confident about our GDP forecast for the present year of just below 3.0 per cent. But we would be concerned by a further rise in the oil price,” says Hofstätter.

Inflation remains high

The recent sharp rise in inflation – recently also in industrialised countries – has further stoked fears of inflation. For example, the consumer price index in Austria reached 3 per cent per year in February. A similar level also exists in the eurozone and the USA, with the annualised inflation rate in the eurozone standing at 2.4 percent, above the target upper limit of the European Central Bank (ECB) of 2.0 per cent per year. “This rise has mostly been driven by the oil price and has not yet reached its peak: even if the oil price does not go any higher this year, but settles at just above USD 100 per barrel, underlying effects will cause the consumer price index to continue rising towards 3 per cent until the summer,” explains Hofstätter. He anticipates that the inflation rate will only fall back noticeably compared to last year from the second half of the year, and could settle at around 2 per cent in 2012.

ECB presses ahead on interest rates

As long as none of the cited risks to economic activity plays out, the analysts at Raiffeisen Research continue to believe that the ECB will move to raise the base rate by 25 basis points on 7 April. Further interest rate rises towards 2 per cent could then follow by the end of the year. Hofstätter is working on the assumption that easier access to central bank liquidity will be maintained in the second quarter, but may also gradually evaporate in the second half of the year. By contrast, the current base rate of the US Fed of between 0 and 0.25 per cent will be maintained for somewhat longer, with the base rate only being raised there in late 2011/early 2012 as conditions on the US labour market improve. “The different stances of the ECB and the Federal Reserve will benefit the euro over the next few months. Levels of up to EUR/USD 1.50 are possible here,” analyses Hofstätter.

Government bonds remain under pressure

Government bonds received temporary support in March due to a series of crises, in particular the disaster in Japan, enabling them to make up some of the losses suffered up to the beginning of February. However, the experts from Raiffeisen Research assume that these price falls could resume in the second quarter. Looking three to twelve months ahead, Hofstätter continues to recommend avoiding longer maturities in particular, as this is where price losses, which are expected across all terms, are likely to be disproportionately high in case of a rise in the yield. As an alternative, he continues to recommend near-money market investments until the rise in yields is more advanced.

Eurozone shares post further positive growth

Corporate profits in the eurozone will continue to develop solidly this year at 10 to 20 per cent, even though the analysts at Raiffeisen Research expect lower growth rates than last year. “We see the stock markets of the eurozone being well supported in the second quarter, as positive influencing factors, such as activity and profit dynamics, remain intact. We also see the rising oil price as the biggest danger in the short term. For the time being, we remain confident about the further development of the stock markets in the eurozone,” explains Lammer.

US stock market is top performer

The US stock market has posted impressive performance since the autumn of last year; Raiffeisen Research analysts expect it to be amongst the top performers also for the second quarter. “American companies brought their profits back towards to the long-term upward trend in the last quarter, and quarterly reports continue to produce positive surprises,” says Lammer.

Japan stock exchange: disaster overshadows everything

“Even if the development of the Japanese stock market achieves a side note at best, given the human tragedy, the earthquake, tsunami and nuclear emergency have resulted in a total collapse of shares,” says Lammer. The main Nikkei 225 and Topix indexes suffered their heaviest falls since 1987 in a space of just two days. Given structural weaknesses, such as low economic growth of only 1.1 per cent in real terms over the last 20 years and a shrinking population, we do not expect any large upward potential in the long term,” explains the expert.

Growth Market stock markets: long-term growth story remains intact

Growth markets outside Europe suffered from high inflation rates and therefore rising money market interest rates in the last half year. “It is now evident that the sought-after objective of gradually weakening growth towards healthy long-term growth rates will be achieved in China and Brazil, the largest economies in their respective regions. Long-term growth outlooks have therefore improved; concerns about massive overheating and any radical braking manoeuvres are fading,” explains Lammer. The negative effects of the crisis in Japan should quickly pass; in the medium term, the reconstruction will have a positive effect on the Asian region and on Brazil, which is rich in raw materials. Lammer therefore expects that stock markets in the growth markets will find their way back to strong performance in the course of the second quarter.

Asset Allocation: stock investments preferred

The economic recovery in the USA and the eurozone, rising inflation and the resulting interest rate rise expected by the ECB will generally put bond prices under pressure. Lammer expects the yield of German government bonds to rise to 3.6 per cent. “For this reason, we are weighting bonds by 5 per cent less and prefer investments in shares,” she recommends. “Despite the shift in monetary policy, liquidity on the stock exchanges should remain high, as many investors have significantly boosted their stock quotas only as of recently. Corporate profits for 2010 have recently proven surprising and we also expect further growth in profits for the first quarter. Dividend payments could also rise against this background.” The increasing interest in M&A transactions should open up additional price potential in the USA and the eurozone. In addition, the expert sees the increased investment activity of companies as an indication of good expectations for the future, with a fall in economic activity becoming less likely.

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Raiffeisen Research, the analytical unit of the Austrian Raiffeisen Banking Group, is specialized in providing analyses of and forecasts for economic cycles, interest rates, currency developments and equities in Austria and Central and Eastern Europe (CEE). Represented in 15 countries in this region, the Raiffeisen Research team regularly provides up-to-date reports on the newest market developments and assessments.

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, more than 59,000 employees service about 15 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 group head office of the entire RZB Group, including RBI.

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