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UniCredit Private Banking Asset Allocation and outlook for Q1 2011: slightly more risk in the portfolio is possible

  • Equities are currently rated as "neutral", corporate bonds "overweight"
  • Low level of interest rates expected to continue well into 2011, inflation is currently not an issue
  • Recession is not expected to return

The crisis year 2008 was followed by a strong recovery in equity markets in 2009. An assessment of 2010 presents a differentiated picture. The crisis in peripheral European countries and initial interest rate moves in Asia caused uncertainty so that stock markets have not been characterised by generally cheerful sentiment in the current year. Nevertheless, the overall environment for risky asset classes continues to be favourable: interest rates are low and should remain so well into the coming year. Inflation is not an issue at the moment and we do not expect the economy to slide into recession again, but we think that growth will slow down. On this basis we take a positive view of risky types of investment. We currently see equities as neutral and we have rated corporate bonds as "overweight".

Equities: neutral! As valuations in the developed world are not demanding, even with a sub-par growth forecast we advocate a neutral stance on equities. We overweight the US as a well-diversified and more defensive market (also considering the fact that the S&P 500 keeps outgrowing the US economy due to its international exposure) and emerging markets, where it is worthwhile taking a "buy and hold" approach. We are neutral on European equities, currently embedding the cheapest valuations, but they appear vulnerable to the peripheral countries’ fiscal crisis. Japan is the area with the least attractive risk/reward profile, as domestic demand is still sluggish while the strengthening of the yen affects export-driven companies.

Bonds: We expect a gradual increase in government bond yields. Quantitative easing policies have been largely discounted by the US Treasury and the Bund markets, and any upside is limited for both of them.

Our positive stance on emerging markets debt is a structural one. A low rate environment and quantitative easing policies in the developed world will continue to support money flows into this asset. We have a positive view on corporate bonds also in light of the fact that credit quality is gradually improving. We have therefore rated corporate bonds as "overweight".

Enquiries: Monika Rosen, Chief Analyst, UniCredit Private Banking
Tel. (0) 50505 40104;
e-mail: monika.rosen@unicreditgroup.at

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