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12.07.2007

Bank Austria Creditanstalt Asset Allocation for Q3 2007: Forecast good, but brief showers possible

  • Equities overweighted – neutral bias
  • Volatility and risk aversion on the rise
  • Europe still preferred over USA

International equities markets continued on their merry way during the first half of the year, even though some soft patches did manage to dampen the optimistic stock exchange sentiment from time to time, while volatility has also risen sharply recently. The clear outperformance of equities over bonds once again illustrates the limited potential on the bond markets at present. Essentially one can say that bonds only benefit at the minute if the risk aversion of investors increases (hedge funds, subprime loans, etc.).

With the ECB already having pushed its key rate up twice in the euro area in 2007 to 4 percent, the likelihood of further rate hikes before the end of the year has risen sharply. Consequently, in response to the strong growth in money supply and the premature curbing of inflationary risks we expect two more interest hikes in the euro area by the end of the last quarter. In the USA, the renewed hope seen in the first quarter of an impending cut in interest rates has recently faded. Therefore we anticipate unchanged key rates in the USA throughout the rest of the year. The positive economic prospects as well as the tightening in Europe and possibly also in Japan are not likely to favour the bond markets in the near future, which is why we uphold our underweighting in the bond segment. Within the bond portfolio we continue to back Eurobonds, mixed with small doses of US and Japanese bonds, in order to broaden the basis for a positive performance in the event of a USD or JPY recovery.

The encouraging trend on the equities markets continues unabated, even though the risk of a temporary consolidation is rising. Investors have recently started to take more care with their investments. Supporting factors include the dynamic mergers and acquisitions activity, the war chests of private equity firms that are full to bursting, as well as the consistently good economic figures. In light of this we are cautiously expecting the positive price development to continue. However, the tangible increase in volatility is an indicator of some clouds starting to gather on the stock exchange horizon. Thus problems with subprime mortgages once again came to the fore at the end of the second quarter. Two major hedge funds in the USA have suffered from this problem, which has impacted negatively on stocks in the financial sector.

Over and above all this, the price of oil has recently started to move upwards again, and depending on the outcome of this year's hurricane season it could revisit previous highs. While the energy sector is likely to continue outperforming in light of these circumstances, the rising energy prices may go hand in hand with a risk of higher inflation and more subdued consumption.

Consequently we uphold our modest overweighting of equities, but in view of the recent increase in risk aversion we adopt a "neutral bias". If in doubt we tend to reduce the equities ratio to neutral rather than increase it further. Within equities we keep Europe overweighted, while US stocks are underweighted. In spite of the strong volatility on the emerging markets we still weight the stock exchanges in these countries neutral thanks to their attractive potential.

Our recommendations include defensive stocks such as the utility Eon, the household appliances manufacturer Reckitt Benckiser and the tobacco firm Altria. There is also an oil company on the list in the shape of SBM Offshore. More cyclical issuers include the HR solutions company Adecco from Switzerland as well as the American giant General Electric.


Enquiries: Bank Austria Creditanstalt Asset Management
Monika Rosen, Head of Research, Tel. (01) 33 147 Ext. 5403;
E-Mail: monika.rosen@amg.co.at