Brief Analysis by Monika Rosen, Chief Analyst at Bank Austria Private Banking:
Global exchanges defying weak economic trends

  • Financial markets robust despite disappointing economic data
  • Liquidity fuelling rally, gold has also improved somewhat
  • Investment strategy remains overweighted on equities

The financial markets remain quite robust despite the fact that the economic data do not necessarily give cause for such positive performance. The International Monetary Fund lowered its global growth forecast for this year to 3.3 per cent. This is down from the projection of 3.5 per cent released in January. What's interesting about this is the fact that the expectations are lower for virtually all regions – from the industrialised nations to the emerging markets. The forecast was mainly lowered because of the weak data for the fourth quarter of 2012, which were not yet available when the January projection was being prepared.

However, the global exchanges are hardly reacting to this development. Although there are setbacks now and then, the markets are recovering from these setbacks relatively quickly. The rally is being driven by the expansive monetary policy of central banks around the world. Recently, there have been growing hopes that the ECB might lower interest rates again at its next meeting on 2 May. The fact that the earnings season for the first quarter in the US is not exactly going well is essentially being lost in the background in light of these hopes. So far, earnings growth for the S&P in the first quarter comes to just 2.6 per cent, which is better than originally expected, but revenues are proving to be particularly disappointing. This means that this earnings growth is the result of cost reductions and not a genuine revitalisation of business.

The bond markets have also experienced an impressive rally of late. Yields of both the core countries and the periphery have fallen considerably. One asset class that has mainly garnered attention due to falling prices lately is commodities. Gold in particular has come under pressure, although the precious metal has already bounced back from the lows of the last week and gained 10 per cent. At the moment, the financial markets are hardly being affected by the rather weak fundamental data being reported and are instead relying on the still generously flowing liquidity.

Summary: Based on these factors, we are sticking to the overweighting of risky asset classes, and particularly of equities, in our investment strategy. We are very much aware of the risks prevailing on the markets. If these risks increase, we will not hesitate to reconsider our relatively risk-tolerant strategy and reduce the equity portion. However, the stock markets are not overvalued and sentiment is not euphoric. Both of these factors suggest that the rally could very well continue for some time.

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