Bank Austria Creditanstalt Asset Allocation for Q2 2007: Stock market correction survived in good health – equities outlook positive
- Europe still outperforming, ratio increased
- Mergers inject momentum
If you take a look over the last twelve months from the end of March 2007, two corrections are visible on the international equities markets, the first in the early summer of 2006 and the second, softer adjustment at the end of February / beginning of March 2007. Both cases involved investors cashing in after making strong gains in higher-risk positions, which exposed the emerging stock exchanges to stronger selling pressure. But in both cases the market found its feet again and soon returned to recording positive price development. We believe that this trend still has some legs in it yet and we stick by our modest overweighting in equities, which well reflects our cautious optimism. Accordingly, bonds are underweighted while cash is neutrally weighted.
On the bond markets at the minute we do not see much potential, unless there were to be another period of uncertainty (just like at the end of February) which leads to an exodus into the safe haven of government bonds. But in fundamental terms the issue of inflation is still lingering about. In Europe the robust economic figures coupled with strong growth in money supply are providing the ECB with good reasons to push interest rates up again. And in the USA, Bernanke described inflation as his "main concern" in his statement before Congress.
The ratios within the bond constituent remain unchanged, with the focus still being placed strongly on the eurozone, while the shares in US dollars and Japanese yen are considered to be strategic additions. They should ensure a greater diversification of currencies in the bond portfolio, which especially in the event of a weak euro (that can never be ruled out completely) will create a broader basis for good performance. In this respect, the particular importance attached to yen carry trades should be mentioned, whose unwinding was a major factor in the latest correction. Our commitments in the yen are also a safety net in case investors exit from carry trades again leading to a renewed strengthening of the Japanese currency.
On the equities markets, Europe has again been able to maintain its outperformance over the USA this year, continuing the development seen in recent years. We have taken note of this in bumping the weighting of Europe up slightly whilst bringing that of the USA down. This decision is also justified by our conviction that the euro will continue to hold up well against other global currencies. Economic developments in Europe at the minute are very benign, and we believe that this will rub off on the stock markets as well.
Share price development is being well supported by the dynamic merger and acquisitions activity. The still ample liquidity and the boom in private equity are making sure interest stays high and are thus increasingly opening up potential for share price gains.
In terms of recommendations we have chosen Pinault Printemps and Tesco, two retailers, which reflects our confidence in European consumption. The pharmaceuticals company Novartis, the tobacco firm Altria and the brand product giant Procter & Gamble constitute the defensive components on the list. Last but not least, we are also wagering on SBM Offshore, an oil company with very good figures and an encouraging orders book.
Bank Austria Creditanstalt Asset Management
Monika Rosen, Head of Research, Tel. (01) 33 147 Ext. 5403;