UniCredit Private Banking asset allocation and outlook for Q2 2011:
Risk components in portfolio increased, crises manageable

  • Turbulence in the Middle East and Japan not a threat to economic recovery
  • Equities currently given an "overweight" rating: preferred regions are the US (overweight) and Europe (neutral); emerging markets "neutral", Japan "underweight"
  • Corporate bonds still "overweight" – preference for high yields
  • Yields on government bonds likely to rise
  • Interest rate increases in Europe: three steps of 25 basis points each expected for 2011
  • Impact of oil price manageable so far
  • Due to current uncertainty, gold remains the preferred hedge in the portfolio

In the first quarter, we increased the risk component in the portfolio somewhat, and we gave equities an "overweight" rating. Corporate bonds have already previously been given an "overweight" rating. We will maintain this rating for the time being, as the business sector has presented strong balance sheets, default rates are declining, and spreads are still above pre-crisis levels. In relative terms, we are giving more risky borrowers (high yield) preference over borrowers with investment grade ratings.

Troubled environment in the Middle East and Japan not a threat to economic recovery
We are positive on equity markets despite the recent turbulence (crisis in the Middle East, earthquake in Japan), given the consolidation of economic recovery in the West, attractive valuations and ample liquidity. Among the mature markets, we favour the US on account of its positive growth momentum and a good reporting season. We continue to see European equities as "neutral", as Europe has the most attractive valuations. Japanese equities remain "underweight" following the recent developments. The economic costs of the earthquake in Japan are estimated at 6 per cent of GDP. In our opinion, the recovery of the global economy is only at risk if the world is faced with an Armageddon scenario such as a nuclear catastrophe in Japan, or if the violent protests were to spread to Saudi Arabia, a major oil-producing country.

Emerging markets neutral: positive over the longer term, upside potential limited in the short term
For tactical reasons, we are maintaining a neutral weighting in emerging markets. In these countries there are growing fears of inflation, and geopolitical instability in North Africa could moreover further reduce investors' risk appetite. From a long-term perspective we believe that emerging markets hold potential as they have high growth rates and valuations are below the historical average. Our positive views of emerging markets bonds are of a structural nature. We are nevertheless maintaining only a relatively small position over the short term as these markets are characterised by inflationary pressure and rising interest rates, and geopolitical risks are increasing.

Yields on government bonds to move upwards
In regard to developments on bond markets, we expect that yields on government bonds will start to rise as economic recovery gets under way. European Central Bank President Jean-Claude Trichet has moreover announced his intention to raise interest rates in Europe soon in an initial step. While we currently do not believe that this will be the beginning of an aggressive series of monetary tightening, we anticipate three steps for 2011, each involving an increase of 25 basis points. European peripheral bonds are currently characterised by high volatility and uncertainty, which is why we would only buy if spreads were to widen again.

We are positive on energy/oil, but we are keeping a close eye on OPEC production. We remain neutral on gold, as we believe that economic recovery and rising real interest rates will make precious metals a less attractive investment option. Gold will nevertheless remain our preferred hedge in the portfolio, given the current high level of uncertainty.

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

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