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18.06.2014

Bank Austria Private Banking Asset Allocation and outlook for third quarter of 2014 – will the stock market rally continue?

  • Interest rates remain extremely low
  • Bond markets surprisingly positive
  • Stocks remain comparatively attractive, although first signs of a slowdown are emerging
  • Still overweight in stocks for the moment, although situation is being closely monitored

Stock market rally continues, but enthusiasm starting to wane
International stock markets in 2014 have not been able to replicate the record returns of 2013, although this year is again seeing many indices post new highs. One example is the DAX, which has recently passed the magical threshold of 10,000 points. The rally is continuing, although turnover levels are low and those involved in trading are showing a lack of 'appetite'. The low interest rates still dominating the scene are continuing to steer investors towards stocks, although fewer people believe rises will continue into the future. Although equity values may not necessarily be ambitious – the price-earnings ratio in many cases is slightly above average values over the past ten years – it would appear that any economic recovery has largely been priced in already. "The sustained nature of the stock market rally has already prevented any significant market corrections for several months now, and the very low level of volatility is a sign that very little risk is being priced into equity values. It may only take a series of minor disappointments to trigger a period of consolidation," claims Monika Rosen, Chief Analyst at Bank Austria Private Banking.

Bond markets join the rally
The very positive performance of the bond markets during the first half of 2014 has been something of a surprise. Although the US Federal Reserve is winding down quantitative easing, yields on US government bonds have also fallen, which is, in turn causing bond prices to rise. In Europe the ECB has recently stepped up its expansionary monetary policy once again, with this region also seeing bond markets rally strongly.

"Following a period of strong performance by fixed-interest securities, we now believe, however, that any potential is slowly being exhausted and expect the trend to be reversed in the coming weeks," predicts Monika Rosen.
German government bonds in particular were no longer able to profit from the latest ECB measures. The geopolitical situation again represents something of an imponderable, particularly this year. The crisis in Ukraine and the recent escalation of events in Iraq have encouraged investors to look for greater security. The prices of oil and gold have duly profited from this, with both recovering recently.

Conclusion:
Bank Austria Private Banking slightly reduced its equity weighting some six months ago, yesterday a further cutback was made. Therefore only a slight overweight in equities remains. "We are not abandoning this approach just yet," confirms Monika Rosen. "In view of the strong rally in the bond markets during the first half of the year, we feel it is more likely that equity prices will see future rises. We are aware, however, that a period of consolidation may occur at any time, which would see us respond by reducing the equity weighting," explains Rosen. Bank Austria Private Banking remains underweight in bonds, since Bank Austria experts take the view that these will only offer limited potential in the near future following a period of steep price increases. Corporate bonds in particular have experienced a significant rally, so there is a definite risk of a correction in this sector. Therefore High Yield Bonds have been removed from the portfolio.

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