The transatlantic gap widens


Vienna 12 December 2014

  • Euro area: geopolitical tensions hamper growth
  • Central Banks: ECB set to create growth – but effectiveness of measures is quite limited
  • EUR/USD: dollar supported by Fed politics and good US economy
  • Oil price: OPEC chooses risky strategy
  • Equity markets benefit from high liquidity and higher company profits
  • Asset allocation: equities still overweighted


“The geopolitical tensions in Europe led to a deterioration of sentiment for investment projects. We see this negative effect only moderately improving in the course of the year 2015. The estimates for the GDP growth for 2015 in the euro area are currently at 1.2 per cent, which is some 2 percentage points below the growth estimates for the US. For the first half of the year we estimate both, the US and euro area inflation rate, to be below 1 per cent (in the euro area it could even temporarily turn negative). In the second half of the year, the rate of price increases in the US will see a strong increase and will level at around 3 per cent, whereas the increase in the euro area will be significantly smaller. The notable differences within the euro area will remain,” starts Valentin Hofstätter, Head of Bond Market & Currency Research at Raiffeisen Bank International AG (RBI) the presentation of the “Strategy Global Markets“ for the first quarter of 2015.

However, in the US, one of the most important trade partners of the euro area, the sentiment is positive. The real GDP for 2015 and 2016 is likely to increase by 3.2 per cent each year, following about 2 per cent per year between 2012 and 2014. The unemployment rate is further declining and by the end of 2015 likely to be already below 5 per cent. “The US have a self-supporting upturn and there are no signs that it is about to end in the foreseeable future. Also, global economic growth should improve in 2015 compared to 2014”, continues Hofstätter.

Central Banks: ECB set to create growth – but effectiveness of measures is quite limited

The euro area governments’ lack of ability to act and their reluctance for serious reforms, leave the European Central Bank (ECB) with a task impossible to fulfill in the long-term: namely to generate sustainable GDP growth. Mario Draghi recently changed his mind and offered the possibility for a purchase of a great range of assets, probably including government bonds. The creation of Central Bank money is aiming for a further pressure on market interest rates. Subsequently, financial institutions should use the new funds for loans that are stimulating growth through investments.

But according to Hofstätter this strategy has several weak points. “First, most companies have sufficient cash holding. Second, the growth expectations of the companies are rather gloomy, which is currently more important for their investment decisions than a zero interest rate. Third, many companies’ creditworthiness has suffered since the financial crisis, while at the same time the capital requirements for banks have increased significantly. In addition to the lacking credit demand, ECB’s assets purchases unintentionally also have a braking effect on credit supply. In the end, the low interest margins for banks make credit lending no longer lucrative. This is a dangerous development affecting especially those banks which focus in their business model on “normal”, low-risk loans and deposits. This monetary policy will end in a cul-de-sac. Meanwhile, the ECB seems to hope to impact the exchange rates and stimulate euro area exports,” continues Hofstätter. The ECB will be able to maintain the yields on bonds very low at least throughout the first half of the year and keep most euro area bond markets very expensive. Investors will have to accept the drought in the interest rate sector for still quite some time.

EUR/USD: dollar supported by Fed politics and good US economy

The yield differential between German and US 2-year government bonds continues to be the main determinant of the development of the exchange rate EUR/USD. “Our expectation that the divergent monetary policies of the Fed and the ECB will continue to intensify is unchanged. Whereas we presume the Fed to increase the key rates by the summer, we are expecting the ECB to launch its large volume bond purchasing program, which will lead to a significant increase in the balance sheet total, throughout the first half of 2015. For mid-2015 we calculate with an exchange rate of 1.17 EUR/USD. During the course of the year, we expect the exchange rate to come down to just above 1.10 EUR/USD,” says Hofstätter.

Oil price: OPEC chooses risky strategy

Recent OPEC decisions show a major strategy change, which tolerates a temporarily low oil price in order to not lose market shares to non-OPEC producers and in the long-term benefit again from a higher oil price. Without a doubt, this is a risky strategy. But it could work.

The OPEC strategy focuses on US shale oil, which is currently about to reach an all-time quantitative record. The current oil price levels of below USD 70 per barrel of Brent puts pressure on shale oil producers, since their profit margins are collapsing and the production becomes uneconomical. As most producers secured a higher price for at least parts of their output through hedging, the price pressure is likely to hit only in the second half of 2015 and then start to lower the output. The combination of reduced outputs from OPEC and shale oil producers, as well as an improving economy, should then lead to price increases. For 2015, the analysts of Raiffeisen RESEARCH expect oil to reach an average price of USD 80 per barrel of Brent. For the euro area the low oil price unquestionably came at the right time for an economic stimulus. Its impact on the growth outlook for 2015 is likely to be significantly stronger than ECB’s bond purchasing program.

Global equity market: main focus on company profits in 2015

In the fourth quarter of 2014, the Nikkei 225 was one of the best performing stock indices on the global markets. This is on the one hand a result of the securities purchasing program of the Japanese Reserve Bank and on the other hand supported by the increased equity share of the state-owned pension fund. “We expect the “liquidity factor” to have direct impact on the growth through investments and consumption, but also indirectly through increasing exports. For 2015, we expect real GDP growth of 1 per cent. On an overall market level, we anticipate double digit profit growth rates for Japanese companies. All these factors in combination with the current moderate valuation, lead to the assumption that the Nikkei 225 will have a strong trading year ahead,” opens Veronika Lammer, Head of Quant Research and Emerging Markets at Raiffeisen RESEARCH, her outlook on the development of the global equity markets.

In 2014, the euro area equity markets lacked significantly behind the US, due to the crisis in Ukraine, the low growth and the fear of deflation resulting from it. Positive factors were the increasingly accommodative ECB policies, as well as higher than expected company profits. For the analysts of Raiffeisen RESEARCH, these two factors are the main reasons to expect a clearly positive development for both, the DAX and the Euro STOXX 50 for the first quarter of 2015.

The main arguments for the US equity market are the current economic dynamic, increasing company profits and the relative stability of the upwards trend. According to recent forecasts, companies in the S&P 500 are likely to have earned about 8 per cent more in 2014 than in the previous year. 2015 should continue to be as good, especially since the strong domestic economy compensates negative effects from the strong dollar and only moderate exports.

EM equity markets: India continues to show growth potential

In the coming year, the equity markets in the Emerging Markets (EM) will continue to develop quite differently. In 2014, the Indian SENSEX was the top performer amongst the EM equity markets with a value appreciation of 31.6 per cent (local currency basis). The PER of 19.4 remains high, but the current profit growth of 9.8 per cent per year still shows growth potential and might almost double to about 18.6 per cent in 2015.

“India’s biggest competitor China only shows moderate increase. The Chinese HSCE index was able to profit from rate cuts in the fourth quarter and increase by 13.7 percent. However, the PER of 7.9 is historically still low. It is still difficult to estimate the impact of the rate cuts on the real economy, since lending policies are still restricted and the margins for banks are declining. Hence, a strong economic impulse is questionable. The current profit growth of 6.0 per cent per year is likely to slightly increase to about 7.2 per cent in 2015,” starts Lammer her overview of the EM equity markets.

On a quarterly and annual view, the analysts of Raiffeisen RESEARCH expect a further worsening for the Brazilian BOVESPA. There is only little upwards potential for company profits and hence the PER of 17.0 is historically seen quite expensive. In addition to the strongly interceding economic policy, especially the muted outlook for the resource sector limits the performance options.

Asset allocation: equities still overweighted

The euro area’s ongoing easing of its monetary policies, through ECB’s planned massive bond purchase, secures the low yield level for Euro-dominated bonds for the upcoming months. Nevertheless, Raiffeisen RESEARCH underweights bonds in its portfolio, as prime borrowers can generate zero or only very little earnings from the current yield levels net after expenses. Also, the positive effects from the monetary measure are already priced in. The overliquidity from Europe and Japan are additionally supporting equities and not bonds.

Many equity markets show unchanged attractive yields at moderate valuations. The optimistic outlook for the global markets leads to expectations of increasing company profits. Hence, the current asset allocation for the first quarter of 2015 overweights the equity segment with 55 per cent (up 2 percentage points), lists the bond segment with 40 per cent (down 2 percentage points) and keeps 5 per cent unchanged in real estate.

“The main risks for our scenario are an escalation of the political climate with Russia and a worsening of the combination of low growth and deflation tendencies in Europe and Japan. The expected US interest rate hike during the first half of the year could generally lead to more volatility on the financial markets, but we do not expect the current upwards trend of equity markets to end,” talks Lammer about possible risks.

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Raiffeisen Bank International AG (RBI) regards Austria, where it is a leading corporate and investment bank, as well as Central and Eastern Europe (CEE) as its home market. 15 markets of the region are covered by subsidiary banks. Additionally, the Group comprises numerous other financial service providers, for instance in the fields of leasing, asset management, as well as mergers and acquisitions. RBI is the only Austrian bank with a presence in the world's financial centers via branches and representative offices.

In total, around 56,000 employees service 14.6 million customers through approximately 2,900 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 60.7 per cent of the shares, 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]).,

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