Bank Austria Private Banking asset allocation & outlook for Q1 2012
Entering the year with renewed momentum – equities making a comeback
- More risk in the portfolio
- Equities and corporate bonds set to "overweight"
- Government bonds of core markets hardly attractive
High-risk asset classes (equities and alternative investments) were off to a good start in 2012, despite persistent turbulence surrounding the government debt crisis in the euro area. This development was supported by the European Central Bank and the Federal Reserve and by favourable economic data from China and the US, most of which exceeded analysts' average expectations. Most recently, some economic indicators stabilised in Europe, too. Our investment stance changes in favour of a positive view of equities and procyclical investments such as commodities (alternative investments asset class). This change in the asset allocation to include high-yield bonds in addition to emerging markets bonds is another step towards an investment strategy embracing more risk.
Equities: overweight! We take a positive stance on equities, both in the long term and in the short term, because they are attractively priced compared with bonds and also in a historical context. Among the developed markets we prefer the US because the Fed will maintain its expansionary monetary policy. Corporate cash flows are at record levels. This should result in higher dividends, continued business spending and a revival in mergers and share buyback activities. We confirm our negative position on European and Japanese equities. Developments in Europe are still dominated by the debt crisis of the peripheral countries. We may increase holdings of Japanese equities should there be signs that the economic recovery programmes are having a positive impact. We take a favourable view of emerging markets. Although the volatile market environment in emerging markets has probably dampened investors' appetite, profit growth will remain strong even if some profit estimates are lower.
Bonds: In the current environment we stay cautious on bonds as efforts to deal with the government debt crisis in the peripheral countries of the euro area will probably take more time. This means that yields on bonds from core countries and on U.S. Treasuries will remain low. In the medium term we expect government bond yields to rise gradually. But the growing public debt will continue to threaten the economy and financial markets. We still see a good opportunity/risk profile for corporate bonds, supported by strong fundamentals. However, high-yield bonds are currently offering even greater opportunities because their prices have been strongly affected by pronounced risk aversion in the recent past. Our positive long-term view of emerging markets bonds is unchanged, all the more so as they can also be used to diversify European bond portfolios.
Enquiries: Monika Rosen
Chief Analyst, Bank Austria Private Banking
Tel. +43 (0) 50505 40104
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