Bank Austria Asset Allocation & Outlook Autumn 2013
Alternatives to equities not very attractive
- Risky assets in demand again this year
- Equities remain overweighted as alternatives are not that attractive
- Economic forecasts for 2014 to dictate equity market trends
- Japanese equities remain overweighted, Yen hedged
The environment on the international markets is continuing to favour risky asset classes, particularly equities, which this year are again performing very well. Although moments of uncertainty do keep arising, most notably the announcement by the US Federal Reserve of its intention to scale back its monthly bond-buying, the bottom line is that the alternatives to equities have little going for them. We therefore remain optimistic with regard to equities, although we admit that their rally has been going on for over four years now, which is quite a long time from a historical perspective. What happens next depends greatly on the economic forecasts for 2014 and then on returns.
Returns rose sharply early on in summer, particularly in the USA, with the Fed gearing up to tighten monetary policy, albeit only slightly. After many years of loose monetary policy, the upcoming shift is undoubtedly especially important, not least because a change in monetary policy in the Eurozone remains unlikely. However, Bank Austria Private Banking Research is not expecting any increase in interest rates on either side of the Atlantic for a long time. However, the rise in investors' risk appetite has curbed the flight into safer havens considerably this year, as shown by the negative performance of German Bunds since the start of the year. Bonds issued by the Eurozone peripherals, by contrast, have done very well.
Not all the high-risk asset classes have performed equally well this year. Emerging-market equities and, in particular, bonds have done comparatively poorly, despite the fact that these countries have been able to remain ahead of their Western industrial counterparts in the growth stakes. The emerging markets are being hit disproportionally by the impending tightening of US monetary policy. Bank Austria Private Banking Research believes that a lot of bad news is already priced in here and so is remaining overweighted on emerging market equities.
Monika Rosen, Bank Austria Private Banking's chief analyst, said: "In our asset allocation, we are remaining overweighted on equities as we continue to regard them as more attractive than bonds. We are also retaining our overweighting on Japanese equities, as Japan is still the best region for equities this year. However, we have hedged the currency, protecting us from fluctuations in the yen. We are also overweighted on the emerging markets, whereas we are neutral on the USA and underweighted on Europe. Our overall bond allocation remains underweighted. We have included corporate bonds and alternative investments in the portfolio to boost diversification."
Enquiries: Monika Rosen
Chief Analyst, Bank Austria Private Banking
Tel. +43 (0) 50505 - 40104