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UniCredit Private Banking Asset Allocation June 2010:

  • Weak euro allows investments in other currency zones to generate positive performance.
  • Volatility up significantly on the stock markets. Underweight stocks.

This May was anything but a walk in the park for the world's stock markets. From the debt crisis in Europe to the oil leak in the Gulf of Mexico and 6 May's mysterious "flash crash" on the New York Stock Exchange that caused the most severe price losses in 20 years, the list of problems plaguing the market is long indeed. The US exchanges in particular suffered marked losses over the month, and the Dow Jones saw its weakest May since 1940.

In contrast, European investors really have something to bank on this year: investments outside of their own currency zone. Because of the weakness of the euro, investments in other currency zones (such as the US dollar) are delivering markedly positive performance. There is no doubt that the markets are and will continue to be much more volatile this year than in 2009. This is also borne out by the American VIX index, which measures the volatility of the S&P 500 and is often called the "fear index". The higher the VIX, the more nervous the market. In May, it climbed to levels around 45 – closing in on the 56 points it had reached during the stock slump at the beginning of 2009.
Most exchanges have lost ground since the beginning of the year, though the extent of these drops varies widely. In Europe, the equity markets in the peripheral countries slid considerably more than the Dax, for example. The correction in China was also significant. The Shanghai exchange has fallen by over 20% since the start of the year, in large part because of fears of upcoming interest rate hikes by the central bank. Overall, the rise in risk aversion has been unmistakable in recent weeks.

Summary: In light of this climate, we are reducing equities to "underweight". This is primarily a response to the recent hefty volatility increases, which actually stands in contrast to the still positive fundamental data. Still, it seems that many market players are cashing in after the strong rally of the past 12 months, so we are also cutting our risk exposure back somewhat. We were already "neutral" on corporate bonds (down from "overweight"), and are maintaining this position.

Monika Rosen
Chief Analyst at UniCredit Private Banking
Tel.: +43 (0) 50505 – 40104
E-mail: monika.rosen@unicreditgroup.at

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