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Bank Austria Creditanstalt Asset Allocation for the first Quarter of 2008: Markets Still Volatile, Investment Strategy Remains Defensive

  • Equities and foreign currencies slightly underweighted

The international stock markets went into the new year with heavy losses. Wall Street has never gotten off to such a bad start in its history. After some hesitation, the Federal Reserve responded to the slide by cutting its key interest rates by 75 basis points at an emergency meeting and followed up with another 50 basis point cut at their regular meeting at the end of January. A cumulated interest rate cut of 125 basis points in only eight days has never been seen before.

Fears of an impending recession in the U.S.A. that could spill over to other regions are making investors very skittish and have pushed volatility to levels not seen since 2003. These fears were fanned by the meagre 0.6 per cent growth achieved by the U.S. economy in the fourth quarter of 2007. In Europe, the ECB has stuck to its stance that an interest rate cut is out of the question because of the associated inflation risks.

We think that the U.S.A. will most likely avoid a recession. The Federal Reserve may make further interest rate cuts, and the ECB may also make a cut in the second half of the year when inflationary pressures abate somewhat.

The stock exchanges remain very nervous. They did react to the Fed’s extraordinary rate cut, but quickly fell back into negative territory. The solid performance of many companies is being overshadowed by the overall bad sentiment. Earnings for U.S. companies outside of the financial sector remain robust, and are even coming in better than expected in some cases. The oil price has also retreated considerably from its record high, which means reduced cost pressure for companies and more money in consumers’ wallets.

As the new trading year opened with the same volatility as the 2007 trading year closed, we are employing a cautious investment strategy for the first quarter of 2008 and are slightly underweighting equities. We think that we have not yet seen the last of the negative effects of the mortgage and financial crisis in the U.S.A., which makes a defensive strategy wise in any case.

In our equity holdings, we have reduced our weighting in Europe, which is now underweighted relative to the benchmark. We are taking profits in Europe, which has outperformed compared to the U.S.A. in recent years. We are now slightly overweighted in the U.S.A. and also in Japan, while the emerging markets are slightly underweighted.

As far as bonds are concerned, we are still overweighted in Euroland, and our foreign-currency holdings are currently in US dollars, yen and Swiss francs. Our aggregate foreign-currency position is underweighted relative to the benchmark and is intended to bring some performance potential into the portfolio in the event that the euro’s climb begins to falter.

Our recommendations for the first quarter of 2008:
Our recommendations are also somewhat defensive. GE (with the NBC broadcasting network) should profit from the advertising spending for the U.S. presidential election. Altria (tobacco) will soon be spinning off its international division, and is also buying back stock and disbursing a handsome dividend.

Our European assets Reckitt (household products), eon (power and gas utility) and Nestle (food) are very defensive. Total is a stable energy sector player with a growing production volume.

Enquiries: Bank Austria Creditanstalt Asset Management
Monika Rosen, Tel. +43 (1) 33 147 ext. 5403
e-mail: monika.rosen@amg.co.at