Bank Austria Creditanstalt Asset Allocation for Q4 2007
Summer storms on the stock exchanges
- Equities weighted neutrally – yet "bias" on Buy
- Uncertainty due to private consumption and oil price not yet cleared up
- Foreign currencies and emerging market bourses underweighted
The final quarter of this year is set to be dominated by the question of how much the financial crisis in the summer will leave its mark on other areas of the economy, if it has not done so already. There are definitely signs of a minor cool-down in economic activity (real estate market in the USA still weak, labour market data also slightly disappointing), but the interest rate cut of the US Federal Reserve in September fuelled the hopes of market players that the intervention of the Fed would calm things down. In this respect the forthcoming Christmas season is obviously a key factor, as it enables particularly informative conclusions to be drawn on private consumption.
Another crucial topic in the current environment is the price of oil, which even without major hurricanes has reached new record highs. On the one hand the upwards pressure on raw material prices is being fuelled by the weak dollar, while on the other hand some geopolitical difficulties have recently surfaced again (Turkey / Iraq). Consequently the international central banks, above all the ECB, find themselves in a dilemma. The escalating oil price (and other raw material prices) is driving inflation, but nobody wants to stall the recovery on the markets in any way by bumping interest up prematurely. Sooner or later though, the anti-inflation tendencies of the ECB will prevail, and the tightening cycle will be continued.
The role of the US dollar is also likely to play its part in the interest considerations of the ECB, since its weakness necessitates a certain tightening of European monetary policy. Yet the fact that the ECB is at best keeping quiet while the Fed has already made one cut does not suggest that a turnaround in currency trends is just around the corner.
Although the summer crisis did not favour the earnings positions of businesses, it now appears that the majority are convinced their results for the 3rd quarter will set them straight again. Moreover there were some very positive surprises, notably in the area of technology.
All told, we are not yet really convinced that the stock exchanges have navigated their way out of the choppy waters completely. In the course of the summer we scaled our equities weighting back to "neutral", and we stick by it now. Nonetheless, if in doubt we would rather buy than reduce further, and consequently our current bias is "overweight".
Looking at the portfolio as a whole we still favour the euro area, particularly for bonds, which for the time being also means that we do not anticipate any immediate change in trend for the dollar. In terms of equities the emerging market exchanges are underweighted, while for bonds our shares in US dollars and the yen are under the benchmark too. Both components (emerging market bourses and foreign currencies in the bond segment underweighted) also underline our approach that still exhibits cautious optimism.
Our recommendations for the 4th quarter include defensive stocks such as the utility Eon and the household goods manufacturer Procter & Gamble. The booming price of oil should provide some tailwind for SBM Offshore. More cyclical stocks include the human resource solutions firm Adecco from Switzerland as well as the retailer PPR (fresh from its takeover by Puma). Finally, technology is represented by Microsoft.
Enquiries: Bank Austria Creditanstalt Asset Management
Monika Rosen, Head of Research, Tel. (01) 33 147 Ext. 5403