- Europe: reforms are pushed in the background
- US are waiting for “Trump effectâ€
- National interests threaten economic development in CEE
- Domestic demand carries economic recovery in Austria
- ATX: friendly beginning of the year on the Austrian stock market
On 21 December 2016, Raiffeisen RESEARCH, an organizational unit of Raiffeisen Bank International AG (RBI), published its two capital market strategies “Central & Eastern European Strategy“ and “Global Markets“ for the first quarter of 2017. In front of journalists, Head of Global Research Peter Brezinschek put a special focus on recent political events, which will have an impact on growth and capital markets in the euro area and CEE, as well as on international markets.
“2016 was the year of political surprises, whose significance will go far beyond 2016. For the capital markets, in addition to the Brexit in June, the unexpected US elections in November and the failure of the Italian constitutional reform in December were defining. In 2017, important elections are planned in the Netherlands, France, Germany and probably also in Italy, which are already casting their long shadows over the overall investment climate. The equity gap of Italian banks was already a main reason for the extension of the Quantitative Easing (QE) by the European Central Bank (ECB) in the amount of EUR 60 billion a month, which was extended until the end of December 2017,†says Brezinschek.
Europe: reforms are pushed in the background
Great Britain’s “yes†to the EU exit and the Italian “no†to a constitutional reform are indicative for the mistrust of large parts of the European population towards European institutions and their own national governments. Political parties that do not see themselves as part of the unpopular “establishmentâ€, promote job security and higher wages through more protectionism. As a consequence, the ""established"" political parties, at least to some extent, start to comply with these populist demands in their own economic policies. Countries such as Portugal, Italy or Spain, announced spending programs to support the economy, although the Stability and Growth Pact would require a more restrictive budgetary policy.
However, it is not only on a national level but also on the European level that attempts are being made to counter the prevailing skepticism and rejection of further reforms. The abandonment of sanctions for violations of the Stability and Growth Pact, as well as the demand for a more expansive fiscal policy of the entire euro area, are both seen as a signal to some core countries of the euro area to increase their government spending. “It is not the quickly achieved, but the sustainable economic growth that permanently increases a nation’s prosperity level. But to achieve this, further structural reforms would be necessary,†makes Brezinschek clear.
The analysts of Raiffeisen RESEARCH expect a real GDP growth of 1.5 per cent (2016e: 1.6 per cent) for the euro area in 2017, and 1.7 per cent in the core countries Germany (2016e: 1.8 per cent), France 1.3 per cent (2016e: 1.2 per cent), Spain 2.5 per cent (2016e: 3.3 per cent) and Italy 0.6 per cent (2016e: 0.9 per cent). In Great Britain, the negotiations over the Brexit seem to already cause a significant slowdown in 2017 real GDP growth down to 1.0 per cent (2016e: 1.9 per cent).
US are waiting for “Trump effectâ€
In the US, the analysts of Raiffeisen RESEARCH expect for 2017 a clearly accelerated GDP growth of 2.4 per cent (2016e: 1.6 per cent). However, this forecast does not include any effects of possible legislative proposals of Trump’s government. However, there is some evidence for a slightly positive effect on the present forecast.
The course setting in the US towards an extremely expansive fiscal policy with a strong expansion of budget deficits brings new dynamics into the markets. One of Donald Trump's first steps as US President is likely to be a massive tax reduction program (both for companies and private households). Also, the announced infrastructure investments were quickly anticipated on the stock markets. Inflation expectations are beginning to rise as commodities and energy prices have also shown a significant upturn. At the same time, long-term capital market interest rates have risen sharply since Trump’s election. In the US, the yield rise is 90 basis points, in Germany 55 basis points, in some Emerging Markets more than 100 basis points. Thus, the return curve has become steeper. A development that is likely to be characteristic throughout 2017.
The interest rates are also rising in the US, albeit not as quickly as in the historical context. Since the US elections, the divergence between market expectations and central bank forward guidance on key interest rates has significantly declined. The quicker the interest rate adjustments are, the lower the long-term rise in yields, which is also relevant for the long end of the European bond market.
National interests threaten economic development in CEE
For 2017, the analysts of Raiffeisen RESEARCH expect a real GDP growth of 3.0 per cent (2016e: 2.6 per cent) for the CEE subregion CE, 3.3 per cent for SEE (2016e: 3.8 per cent) and for EE a growth of 1.0 per cent (2016e: -0.5 per cent). Particularly noteworthy are the growth leaders Albania with a GDP growth rate of 4.0 per cent (2016e: 3.5 per cent), Romania with 3.6 per cent (2016e: 4.7 per cent) and Slovakia with 3.3 per cent (2016e: 3.3 per cent).
“The tendency to increasingly favor national interests over market solutions is, unfortunately, also noticeable in CEE. In the short term, this will not threaten the strong growth dynamics, but in the longer term the great advantages of flexibility and deregulation in these markets will decrease,†outlines Brezinschek the situation in the CEE region.
In CE/SEE, the strong domestic demand still dominates in 2017, leading to an average GDP growth of just over 3 per cent, but investment should remain below expectations. While in the short term the utilization of EU funds remains important, foreign direct investment is influenced in the long term by the political environment. The encouraging trend on the labor market and the relatively high wage increases continue to support private consumption as a growth driver. Russia returns to modest growth at 1.0 per cent (2016e: -0.5 per cent) and Ukraine at 2.0 per cent (2016e: 1.0 per cent).
Domestic demand carries economic recovery in Austria
The moderate economic upturn in Austria, driven by domestic demand, is likely to continue with real GDP growth rates of 1.3 per cent (2016e: 1.4 per cent) in 2017. Due to the increase in foreign trade, 1.5 per cent are expected in 2018. Employment has developed positively in recent months. However, this should only be a short break because, as a result of various factors (migration from new EU member states, access to the labor market for asylum seekers, increased participation by women and the elderly) employment growth should not be sufficient to absorb the increase in the labor force potential.
The inflation differential to the euro area further expanded somewhat in 2016. This is mainly due to the categories “Restaurants/Hotels†and ""Housing"" and thus the “usual suspectsâ€. The 2016 and 2018 analysts expect Raiffeisen RESEARCH to have higher inflation rates of 2.0 per cent and 2.1 per cent (euro area: 1.5 per cent).
Oil price
For the first time since December 2008, the OPEC member states agreed to reduce their oil production by 1.2 million barrels per day to 32.5 million barrels per day. The agreement will apply from1 January 2017 and is valid for six months. In any case, this deal will now speed up the approximation of supply and demand. As a consequence, the currently oversupplied oil market should therefore turn into a deficit in the first half of 2017. Raiffeisen RESEARCH hence adjusted its previous forecast for 2017 by USD 3 and assumes an average price of USD 58 per barrel of Brent for the coming year.
Impact on currency markets
The rise in interest rate differentials between the US and the euro area should benefit the US dollar, particularly in the first half of 2017. By mid-2017, the analysts of Raiffeisen RESEARCH hold their forecast of 1.02 EUR/USD. In contrast, they see little movement in the Swiss franc against the Euro. Due to the political environment in Poland and the expansive monetary policy, the EUR/PLN forecast is significantly more cautious than previously. Raiffeisen RESEARCH also sees little movement in HUF and CZK, although the fixation to the Euro is likely to be lifted in the second half of 2017. The stronger oil price and the interest rate differential support the RUB.
Impact on bond and equity markets
The profit expectations for 2017 are ambitious, but in the case of the US only realistic if significant tax reductions are implemented. The moderate economic recovery and abundant supply of liquidity from the central banks are continuing and hence defining positive factors for stock markets. The global interdependence of bond yields with longer maturities leads to price declines in bonds. The short end should, however, be spared by the QE in Europe, both in government securities and corporate bonds.
Much like on the established equity markets, the analysts of Raiffeisen RESEARCH expect conditions in the CEE region to be upbeat in the first half of 2017. Along with monetary policy, both the growth expectations and earnings development will likely drive prices up. We see upside potential ranging from 5 to 10 per cent for the majority of the equity indices up until mid-2017 with the Austrian ATX being among the front runners. On the bond markets, Raiffeisen RESEARCH expects a certain amount of consolidation in the first few months of the year following the corrections at the end of 2016. In general, however, a moderate upward trend in yields should emerge in the second half of the year at the latest.
ATX: friendly beginning of the year on the Austrian stock market
Over the past year, the leading Viennese stock index ATX achieved a better price performance than its European counterparts with an increase of around 11 per cent including dividends. For the new stock market year, the analysts of Raiffeisen Centrobank are also expecting a similarly good performance and expect the ATX to reach around 2,800 points until year-end 2017. They are more optimistic about the development in the first half of 2017 and see a slight decline in visibility for the rest of the year. Their assessment of rising prices in the first half of 2017 is supported by a further improvement of economic dynamics in Europe, very robust economic data in CEE, the positive impact of the USD strength on Austrian exporters and the ongoing relative attractiveness of shares over bonds. According to Raiffeisen Centrobank, the fact, that in advanced share cycles, secondary stocks frequently result in a better price development than highly capitalized international standard values, is also supporting the Austrian stock market. Therefore, the valuation of the ATX with an adjusted PER of around 12 for the year 2017 appears appropriate and allows further price increases with good profit dynamics for companies.
Financial analyst: Peter Brezinschek, RBI
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