UniCredit Private Banking asset allocation and outlook for Q1 2012:
Risk components in the portfolio balanced, debt crisis remains the main topic

  • European debt crisis remains the focus of attention, US avoids renewed recession
  • Equities currently rated as "neutral": preferred regions are the US and emerging markets (both "overweight"), Europe and Japan "underweight"
  • Bond markets will remain challenging in 2012: emerging markets bonds "overweight"
  • Gold remains the preferred hedge in the portfolio, given the current high level of uncertainty

As the debt crisis in the euro area has not yet been resolved and investors' uncertainty over a global economic slowdown continues, we maintain our "neutral" stance on equities. Our cautious attitude towards government bonds remains unchanged as yields on bonds issued by core countries have reached very low levels, resulting in very limited potential for a further decline in yields. Corporate bonds still show favourable fundamentals. Companies have reduced their debt ratios and benefit from large cash holdings. Nevertheless, we believe there is limited potential, and therefore we give this asset class a "neutral" rating.

European debt crisis remains the focus of attention; US avoids renewed recession
While there are fears that the European government debt crisis will have an impact on global economic growth, the global economy is being supported by expansionary monetary policies. Structural growth of emerging markets and the recovery of corporate investment, on the back of sound balance sheets, will provide additional impetus. Overall, we therefore see equity markets as "neutral". Among the developed markets we prefer the US. Apart from monetary easing, record cash flow levels provide a positive environment for corporate investment. Moreover, we do not expect the US to slide into recession again. On the other hand, we confirm our negative stance on regional equity markets in Europe and Japan, giving them "underweight" ratings. In Europe the necessary fiscal policy measures are having an adverse impact. Our cautious attitude to Japan is based on weak global economic growth and exchange rate considerations.

Emerging markets "overweight": sound growth rates combined with some risks
We continue to overweight equities in emerging markets in the fourth quarter. In 2012, economic growth in emerging markets will probably be slightly lower than in 2011. However, stronger efforts will be made to use domestic consumption as a growth driver to offset the weaker outlook for exports in connection with the problems facing Western industrial countries. Moreover, central banks have already started to reduce interest rates. They are thereby shifting their focus away from inflation towards economic growth, which should have positive effects on local equity markets. On the basis of sound state finances, governments will have leeway for measures to stimulate growth if – contrary to expectations – the economic momentum weakens significantly.

Bond markets – 2012 will be another challenging year
In view of the European debt crisis, developments in bond markets will continue to be determined by investors' risk aversion, which prompts them to seek safe havens thus keeping yields on bonds issued by core countries at low levels. It is only a political solution that could provide a sustainable remedy in this respect. Our positive stance on emerging markets bonds is based on structural considerations, with preference being given to investments in local currency. We assume that key interest rates in the euro area will be further reduced to 1.0%; the decision will probably be made at one of the next meetings of the ECB's Governing Council.

We take a neutral stance on oil. While demand is strong and reserve capacity limited, the uncertain growth scenario limits upward potential. We maintain our "overweight" rating on gold. The main reasons for this are continued uncertainty and the fact that gold could strongly benefit from another round of quantitative easing. Gold is also our preferred hedge in the portfolio. 

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

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