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03.12.2009

UniCredit Group publishes capital market outlook for 2010

According to an analysis just completed by UniCredit Group, the general conditions will remain positive for the stock markets into the coming year. UniCredit Group expects the Euro STOXX 50 and the ATX to reach slightly higher levels and expects that the euro will remain very strong against the US dollar. The ECB is not expected to raise its interest rates until 2011.

EUR-USD heading towards 1.60
"No matter where it comes from in the world, positive news is firming up EUR-USD. In contrast, negative news causes EUR-USD to soften. Even though this seems strange at first glance, the mechanism becomes clear when you try to answer the question of whether the US dollar or a synthetic euro is more likely to survive a depression," said Michael Rottmann, head of interest rate and currency strategy at UniCredit Group. Up until now, the US dollar has gotten the clear nod, and this was the reason behind its consolidation in the crisis period covering the fourth quarter of 2008 and the first quarter of 2009. Starting in the second quarter of 2009, riskier asset classes began to boom and optimism about the development of the economy began to increase, giving the EUR the upper hand; the EUR-USD exchange rate found solid ground at around 1.50. As UniCredit Group is expecting sentiment to remain positive at least until the middle of 2010, there is good reason to believe that this trend will continue. The second factor pointing to a strong euro: The further liberalisation and internationalisation of China's currency will inevitably bring a new world order. The internationalisation and strengthening of the Chinese yuan is likely to be detrimental to the dollar above all.    Nevertheless, after EUR-USD peaks at between 1.55 and 1.60, UniCredit Group predicts another trend reversal for the currency pair in the second half of 2010. Once we approach the current record highs again, the worst should then be over for European exporters. Even though the last concerted EUR-USD intervention took place some nine years ago, the passing of the 1.55 mark is likely to at least trigger stepped up rhetoric about a detrimentally unilateral appreciation of the euro, and this should prevent further EUR-USD rises. In addition, the US Fed will begin hiking its key rates before the ECB, and this will make USD refinancing more expensive. Once this happens, it won't matter if these carry trade positions are simply liquidated or shifted to the Swiss franc and the yen. In any case, this should cause the dollar to strengthen in the latter part of 2010.

The careful normalisation of interest rates should bring yields up at a tolerable pace
In light of the uncertainty about how sustainable the economic recovery is, the ECB, BoE and Fed are likely to proceed very cautiously so as not to extinguish the more optimistic economic sentiment or shock the financial markets. "The US Fed is not likely to begin raising its interest rates until the second half of 2010. And we expect the ECB to wait until some time in 2011," said Michael Rottmann, head of interest rate and currency strategy at UniCredit Group. However, the ECB is likely to end full allocation during its tender operations in 2010, which is essentially the same as an indirect key interest rate hike. As a result, the three-month EURIBOR is then likely to rise from its current level just under 0.70% (30 basis points below the official key interest rate of 1%) to 1.3% by the end of 2010. This cautious approach will also keep rises in yields for long-running bonds in check. The ten-year swap rate is only expected to increase from 3.40% now to 4.20%.

Global equity markets: keep betting on medium-term improvement
The general conditions will remain supportive for stocks into the coming year. Leading economic indicators will continue to improve, and will lend more support to expectations that corporate earnings will continue to increase. "We think that confidence will increase in the projections for significant earnings improvements in the coming quarters and that this will help boost the stock markets," said Gerhard Schwarz, head of global equities strategy at UniCredit Group. The valuation indicators are likely to have enough momentum to come back up to the highs marked in the last economic cycle. On the European equity market, we expect the P/E ratio to rise from its current 12.6 points to 13.5. The very good valuations of stocks compared to government bonds is also pointing to limited potential for short downward corrections in the coming months. At present, the dividend yield for the Euro STOXX 50 is currently at around 3.8%, just under the 3.95% yield for thirty-year government bonds. The Euro STOXX 50 is likely to reach levels around 3250 points under these conditions (DAX: 6500 points).

Once the leading indicators reach their cyclical highs during the first half of 2010, however, the stock markets should gradually become more susceptible to negative news again. Especially when the central banks begin pulling liquidity back out of the banking sector at a faster pace as expected in the second quarter of 2010, we could see increased volatility on the financial markets, and this could in turn increase investor risk aversion. Under these conditions, UniCredit Group expects that a sideward trend will set in on the stock markets in the spring of 2010 and continue for a number of months; corrections of over 10% are probable in this phase.

By the middle of the year, the stock indexes should already be listing below the highs reached in the first half of 2010 (Euro STOXX 50: 3100 points). Once this phase passes, conditions are likely to remain mixed, with positive and negative surprises possible from some key market drivers. Because conditions in the second half of 2010 are still very unclear at this point, UniCredit Group is currently expecting the equity markets to remain flat in this period.

Financial stocks enable Vienna stock exchange to outperform
The ATX, the key index for the Vienna stock exchange, continued its climb in the second half of 2009 and is currently about 40% higher than at the end of 2008. The index has outperformed Western Europe's major indexes. The ATX was especially pushed by the financial stocks Raiffeisen International, Erste Bank and Vienna Insurance Group, as well as the oil company OMV.

Because of the financial crisis and the high level of uncertainty on the international markets, companies with more defensive strategies and very  solid balance sheet structures were at the head of the pack in the first quarter of 2009. Sentiment then swung in the opposite direction at the beginning of the second quarter, at which point the improving early indicators helped boost cyclical companies, banks and the construction industry including ancillary trades. Defensive stocks such as Verbund and Österreichische Post lost more than 10% in the second half of the year. However, no other stocks were able to keep pace with the surges posted by Immoeast, Immofinanz and Bwin since the beginning of the year.

The ATX has made up about 75% of its plunge at the beginning of March and is now roughly 50% below its all-time high. Because of the lower price levels, trading on the Vienna exchange is considerably lower than in 2008, but this decline can also be attributed to increased risk aversion on the market. "After a number of earnings projection revisions, we expect earnings on the stocks in the ATX to fall by around 47% because capacity utilisation levels are still poor, and companies are being hit by additional restructuring costs," said Peter Bauernfried, analyst for Austrian stocks at UniCredit Group. "In 2010, we expect earnings to increase by 42% because of the low basis in 2009. The cost cutting programmes should also begin taking effect, and sales should grow gradually in 2010."

The market valuations are high because of the earnings revisions. Based on the earnings estimates for 2010, UniCredit currently puts the market valuation at a P/E of roughly 13.5. UniCredit expects this generally good trend to continue on the Viennese market over the coming months. The ATX has enough potential to gain around 15% by the middle of 2010, and the projection for the index is 2,850 points. How corporate earnings will develop in the second half of the year is still unclear. In light of this, UniCredit Group is expecting restrained price developments for the ATX stocks. The ATX may be at 2,900 points at the end of 2010.

However, UniCredit's analysts also see a danger that the current projections for the development of operational earnings in 2010 are too optimistic. Current buy picks include the real estate stocks Immoeast and CA Immo Anlagen and also the construction firm Strabag, which should profit from the various economic stimulus programmes. The analysts also recommend investing in Andritz, Bwin, Mayr-Melnhof, Semperit, OMV and SBO.

The market projections at a glance:

Midle of 2010

End of 2010

ATX

2,850

2,900

DAX

6,200

6,200

Euro Stoxx 50

3,100

3,100

S&P 500

1,175

1,175

Dow Jones

11,100

11,100

Topix

880

880

Nikkei 225

10,000

10,000

Promising regions:

Until spring 2010: Emerging markets, Eurozone, Pacific ex Japan
From spring 2010: USA, Europe ex Eurozone

Economic growth EEA 0.8%

Middle of 2010

End of 2010

Euro-USD

1,57

1,48

USD-Yen

93

100

3M Euribor

1,10%

1,30%

10-year yield

4,05%

4,20%

About UniCredit Group
UniCredit s a major international financial institution with over 10,200 branches and approximately 174,000 employees as of 31 December 2008. It has a very established presence in 22 European countries and is represented on 27 further markets. UniCredit has the largest international bank network in the CEE countries with over 4,000 branches and outlets. The Group is active in the following countries: Austria, Azerbaijan, Bosnia and Herzegovina, Bulgaria, Croatia, the Czech Republic, Estonia, Germany, Hungary, Italy, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Poland, Romania, Russia, Serbia, Slovakia, Slovenia, Turkey and Ukraine.

Press contacts:
Nicole Rappl, Tel. +49 89/378-26001, nicole.rappl@unicreditgroup.de
Tiemon Kiesenhofer, Tel. +43 (0)50505-52819, tiemon.kiesenhofer@unicreditgroup.at

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