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Financial Markets Global Strategy
3rd quarter 2013
Economy instead of liquidity as the
main driver
Expansive central bank policy has peaked out
Corporate bonds – End of the cycle is near
Equity markets take a breather
High volatility in the Emerging Markets
www.raiffeisenresearch.at
3rd quarter 2013
1
Content
Financial Markets Global Strategy
Topic: Economic recovery instead of cheap money
3
Forecasts
4
Special: Emerging Markets – Is the party over?
6
Asset Allocation
7
Economic forecast Euro area
11
Economic forecast USA
12
Special Fed lets the cat out of the bag
13
Interest rates
14
Yield forecast
15
Currency trends
16
Credit/Corporate Bonds: Financials
18
Corporate Bonds: Non-Financials
20
Oil market
21
Gold market
22
Special: Reduction in abundant liquidity as a burden for the summer
23
Stock markets – USA
24
Stock markets – Euro area
26
Stock markets – Non-Euro
27
Special: Quo vadis, Nippon?
28
Stock markets – Japan
29
Global industry groups
30
Emerging Markets – China
32
Emerging Markets – India
33
Emerging Markets – Brazil
34
Technical analysis
35
Stocks
37
Acknowledgements
39
Explanation:
e ... estimate
f ... forecast
r.h.s. ... right hand scale
EU27 ... GDP weighted average (without Croatia)
n.v. ... no value
BM ... benchmark
EM ... Emerging Markets
UAE ... United Arab Emirates
WTI ... West Texas Intermediate
2
AI ... alternative investments (Hedge funds & real estate)
IL ... inflation linked bonds
IG ... investment grade
HY ... High-Yield
bp ... basis points
ASW ... Asset Swap Spread
CPI ... Consumer Price Index
MSCI ... Morgan Stanley Composite Index
3rd quarter 2013
Topic
Economic recovery instead of cheap money
 Leading indicators at a critical threshold
 Monetary expansion will continue, but more and more questions are being asked
 Consolidation on the financial markets during this transitional phase
During the last three years, leading indicators have repeatedly shown the same
picture: increasing optimism in the fourth quarter and then a negative turn in sentiment starting from the spring. This year, the key corporate sector survey (ISMs
and PMIs) once again headed south from March on. But the pattern of behaviour
will likely be different in 2013, due to the lack of major negative factors (such
as the Greece restructuring last year) and the impact of monetary policy stimulus
and structural reforms. Consequently, following negative developments in Q2,
we expect that the growth threshold will be reached for the Eurozone as a whole
in the fourth quarter. For 2014, Eurozone growth should average 1 to 1.5 percent as the recovery continues. In the USA, the upward forces are expected to be
somewhat stronger, with growth of 1.5 percent representing the lower boundary
in 2013. With projected GDP growth rates between 2 and 3 percent in the next
18 months, there are justifiable reasons for talking about winding up the Federal
Reserve’s ultra-expansive monetary policy. At the same time, one fundamental
prerequisite for the growth projections in the Eurozone and the USA is a significant improvement in the leading indicators over the next 3-4 months.
Impact on monetary policy
Since the spring, central bankers at the US Federal Reserve who are in favour of
winding up the asset purchase programme (with a monthly volume of USD 85 bn)
have been speaking out publicly. They are still in the minority, but Ben Bernanke
has already announced that the bond purchase programme of the Fed will be
reduced if the labour market continues to improve. This reduction is likely to start
in Q4. In Europe, we do not see any reversal of the trend in the ECB’s supply of
money before the spring of 2014.
Impact on the currency markets
Accordingly, the US dollar should enjoy an advantage over the euro during the
second half of 2013, due to higher money market and capital market rates. With
this in mind, USD could conceivably correct below than 1.30 during the second
half of 2013. For EUR/CHF, the range will probably be 1.22 to 1.27 until the
end of the year.
Impact on the capital markets
Conditions on the equity and bond markets have become more unsettled since
May, as the economic expectations have been disappointing and the inflows
of liquidity are in question. In terms of interest rates, there will essentially be no
changes until the end of the year, but the looming cloud of monetary tightening
will gradually cause long-term government bond yields to rise in the USA. Europe
will not be able to decouple from this development, as the safe-haven effect will
become less pronounced. The period of transition from liquidity-driven trends to
economically-motivated trends will result in high volatility on the equity and bond
markets until the autumn. But whereas equities should eventually move ahead on
their upward trend, government and corporate bonds will likely drift further away
from their highs over the long run.
Consequently, the key will be whether leading indicators begin heading higher
again in the next 3-4 months, or whether they repeat their pattern from the last
three years.
Peter Brezinschek
3rd quarter 2013
The gap closes
60
20%
30
12%
0
4%
-30
-4%
-60
-12%
-90
2010
-20%
2011
2012
G10 Economic Surprise Index*
MSCI World, 4 m change in % (r.h.s.)
* Illustrates deviation of actual economic data from consensus estimates for G10 countries
Source: Citigroup, Bloomberg, Raiffeisen RESEARCH
Excess liquidity
Central bank liquidity
USA
Euro area
Japan
Switzerland
2009
USD 1,770 bn
2013
USD 2,926 bn
2009
EUR 1,052 bn
2013
EUR 1,295 bn
2009
JPY 93 trl
2013
JPY 146 trl
2009
CHF 48 bn
2013
CHF 363 bn
Quelle: Thomson Reuters, Raiffeisen RESEARCH
Recommendations*
Stock markets:
Buy
Japan
Hold
Europe, USA
Sectors:
Overweight
Energy, Industrials, IT,
Consumer Discretionary,
Utilities
Underweight
Telecommunication, Financials, Health care, Consumer Staples, Materials
Bonds / FX:
Buy
EUR vs. CHF, government
bonds FR, IT, ES, GB
Sell
JPY vs. EUR
Corporate bonds:
Sell
Financials
* horizon: end of 3rd quarter 2013
Source: Raiffeisen RESEARCH
3
Forecasts
GDP (real %yoy)
Countries
2011
Current account balance (% of GDP)
Consumer price index (% yoy)
2012
2013e
2014f
Countries
2011
2012
2013e 2014f
Countries
2011
2012
2013e 2014f
Austria
2.7
0.8
0.5
1.5
Austria
3.6
2.6
1.9
1.8
Austria
1.4
1.8
1.5
Germany
3.1
0.9
0.5
1.8
Germany
2.5
2.1
1.5
1.5
Germany
5.7
5.8
5.5
0.9
5.5
France
2.0
0.0
-0.4
0.6
France
2.3
2.2
1.3
1.5
France
-1.9
-2.3
-2.4
-2.6
Belgium
1.9
-0.3
-0.1
1.4
Belgium
3.4
2.6
1.2
1.8
Belgium
-1.8
Netherlands
1.1
-1.0
-0.8
1.1
Netherlands
2.5
2.8
2.7
1.6
Netherlands
Finland
2.8
-0.2
-0.7
1.5
Finland
3.3
3.2
2.3
1.9
Finland
Ireland
1.4
0.9
1.3
2.4
Ireland
1.2
1.9
1.0
1.4
Ireland
Italy
0.5
-2.4
-1.7
0.7
Italy
2.9
3.3
1.7
1.5
Italy
Spain
0.4
-1.4
-1.5
1.0
Spain
3.1
2.4
1.5
1.1
Spain
Portugal
-1.6
-3.2
-2.3
0.9
Portugal
3.6
2.8
0.6
1.3
Greece
-7.1
-6.4
-4.5
-1.0
Greece
3.1
1.0
-0.3
-0.3
Euro area
1.5
-0.5
-0.7
1.2
Euro area
2.7
2.5
1.5
1.6
Euro area
GB
0.9
0.2
0.8
1.7
GB
4.5
2.8
2.8
2.5
GB
Switzerland
1.9
1.0
1.3
1.6
Switzerland
0.2
-0.7
0.1
0.7
USA
1.8
2.2
1.5
2.5
USA
3.2
2.1
1.5
2.0
Japan
-0.6
1.9
2.2
2.3
Japan
-0.3
0.0
0.1
Brazil
2.7
0.9
2.4
3.8
Brazil
6.6
5.4
China
9.3
7.8
8.0
8.5
China
5.4
2.7
-1.1
-1.4
-1.7
10.1
10.1
10.5
9.5
-1.5
-1.8
-2.0
-2.0
1.1
4.9
5.2
5.5
-3.1
-0.5
0.4
0.8
-3.7
-1.1
0.8
1.5
Portugal
-7.0
-1.5
0.5
1.5
Greece
-9.9
-3.4
-1.0
0.0
0.2
1.2
1.5
1.4
-1.3
-3.7
-3.2
-2.8
Switzerland
8.4
13.6
12.0
13.0
USA
-3.1
-3.0
-2.8
-2.5
1.5
Japan
2.0
1.1
1.0
2.1
6.1
5.2
Brazil
-2.1
-2.4
-3.3
-2.9
3.0
3.3
China
1.9
2.3
2.6
2.0
Source: Thomson Reuters, Raiffeisen RESEARCH
Source: Thomson Reuters, Raiffeisen RESEARCH
General budget balance (% of GDP)
Public debt (% of GDP)
Ratings
Countries
Countries
Source: Thomson Reuters, Raiffeisen RESEARCH
Austria
2011
-2.5
2012
-2.5
2013e 2014f
-2.6
2011
2012
2013e 2014f
-1.8
Austria
72.5
73.4
74.1
74.1
Austria
Moody's
S&P
Fitch
Aaa (n)
AA+ (s)
AAA (s)
Germany
-0.8
0.1
-0.5
0.0
Germany
80.5
81.7
81.0
78.7
Germany
Aaa (n)
AAA (s)
AAA (s)
France
-5.3
-4.8
-4.0
-3.6
France
85.8
90.2
94.4
96.3
France
Aa1 (n)
AA+ (n)
AAA (n)
Belgium
-3.7
-3.9
-2.9
-3.1
Belgium
97.8
99.6 101.4 102.1
Belgium
Aa3 (n)
AA (n)
AA (s)
Netherlands
-4.5
-4.1
-3.6
-3.6
Netherlands
65.5
71.2
74.6
75.8
Netherlands
Aaa (n)
AAA (n)
AAA (n)
Finland
-0.8
-1.9
-1.8
-1.5
Finland
49.0
53.0
56.2
57.7
Finland
Aaa (s)
AAA (s)
AAA (s)
Ireland
-13.4
-7.6
-7.5
-5.0
Ireland
106.4 117.6 123.0 119.7
Ireland
Ba1 (n)
BBB+ (s)
BBB+ (s)
120.8 127.0 131.1 131.7
Italy
Baa2 (n)
BBB+ (n)
BBB+ (n)
Spain
Baa3 (n)
BBB- (n)
BBB (n)
Ba3 (n)
BB (s)
BB+ (n)
Italy
-3.8
-3.0
-2.9
-2.5
Italy
Spain
-9.4
-10.6
-6.5
-5.5
Spain
Portugal
-4.4
-6.4
-6.0
-4.5
Portugal
108.3 123.6 123.5 125.0
Portugal
Greece
-9.5
-10.0
-4.0
-3.0
Greece
170.6 160.1 176.6 180.5
Greece
Euro area
-4.2
-3.7
-2.9
-2.8
Euro area
87.3
90.6
93.5
94.0
GB
GB
-7.8
-6.3
-6.2
-6.0
GB
85.5
90.0
95.4
97.0
Switzerland
0.5
0.7
0.5
0.7
Switzerland
44.6
43.8
43.0
42.0
98.7
102.3
104.4
104.9
Japan
Aa3 (s)
AA- (n)
A+ (n)
230.3 237.9 241.1 245.6
Brazil
Baa2 (p)
BBB (n)
BBB (s)
Aa3 (s)
AA- (s)
A+ (s)
69.3
84.2
91.9
95.7
C
B- (s)
B- (s)
Aa1 (s)
AAA (n)
AA+ (s)
Switzerland
Aaa (s)
AAA (s)
AAA (s)
USA
Aaa (n)
AA+ (s)
AAA (n)
USA
-8.7
-6.9
-4.0
-3.3
USA
Japan
-9.9
-10.2
-9.8
-8.0
Japan
Brazil
-2.6
-2.5
-3.0
-2.8
Brazil
36.4
35.2
34.5
33.0
China
China
-1.1
-1.6
-2.0
-1.5
China
15.3
15.9
13.0
12.0
Outlook: p = positive, n = negative, s = stable
Source: Bloomberg
Source: Thomson Reuters, EU-Comission, Nationale
governments, IMF, Raiffeisen RESEARCH
Source: Thomson Reuters, EU-Comission, National
governments, IMF, Raiffeisen RESEARCH
USD/EUR
current
Forecast
20-Jun 20131
Sep-13
Dec-13
Mar-14
Jun-14
GB
0.85
0.87
0.87
0.86
0.83
Switzerland
1.23
1.25
1.25
1.28
1.28
129
135
140
147
151
Sweden*
8.72
8.46
8.42
8.37
8.31
Norway*
7.94
7.45
7.43
7.41
7.38
USA
1.32
1.31
1.30
1.31
1.35
China
8.08
7.96
7.87
7.86
8.10
Countries
Japan
1
5:00 p.m. CET
* Consensus estimates
Source: Thomson Reuters, Raiffeisen RESEARCH
1.55
Forecast
Currencies: FX per Euro
1.45
1.35
1.25
1.15
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Source: Thomson Reuters, Raiffeisen RESEARCH
4
3rd quarter 2013
Forecasts
Euribor 3M (%)
Money market rates 3M (%)
current
Forecast
20-Jun 20131
Countries
Germany
Sep-13
0.21
Dec-13
0.25
2.0
Mar-14
Jun-14
0.30
0.30
0.35
GB
0.51
0.50
0.50
0.60
0.60
Switzerland
0.02
0.00
0.00
0.00
0.00
Japan
0.15
0.10
0.10
0.10
0.10
USA
0.27
0.25
0.30
0.30
0.30
5:00 p.m. CET
Source: Thomson Reuters, Raiffeisen RESEARCH
1
Government bond yields 2Y (%)
current
Forecast
current
Forecast
Countries 20-Jun Sep-13 Dec-13 Mar-14 Jun-14
Countries 20-Jun Sep-13 Dec-13 Mar-14Jun-14
DE
0.24
0.2
0.2
0.3
0.5
DE
0.75
0.7
0.9
1.0
CH
0.02
0.0
0.0
0.1
0.2
CH
0.30
0.2
0.3
0.4
0.4
Japan
0.13
0.1
0.1
0.1
0.2
Japan
0.35
0.3
0.3
0.4
0.5
USA
0.32
0.4
0.5
0.5
0.6
USA
1.29
1.3
1.5
1.7
1.9
5:00 p.m. CET
Source: Thomson Reuters, Raiffeisen RESEARCH
0.5
Jun-11
History
1
1
1.0
0.0
Jun-10
Government bond yields 5Y (%)
1
Forecast
1.5
Jun-12
Jun-13
Jun-14
Forecast
FRA
Source: Thomson Reuters, Raiffeisen RESEARCH
1.2
5:00 p.m. CET
Source: Thomson Reuters, Raiffeisen RESEARCH
1
Yield spread 10Y - 2Y
3.5
Forecast
2.5
Government bond yields 10Y (%)
current
Countries
20-Jun 20131
Forecast
Sep-13
Dec-13
Mar-14
Jun-14
Austria
2.09
2.0
2.1
2.2
2.4
Germany
1.67
1.6
1.8
1.9
2.1
France
2.26
2.1
2.3
2.4
2.6
Italy
4.57
4.2
4.5
4.6
4.6
Spain
4.87
4.6
4.6
4.6
4.7
GB
2.30
2.2
2.2
2.4
2.6
Switzerland
0.96
0.7
0.9
1.0
1.1
Japan
0.86
0.8
0.8
0.9
1.0
USA
2.40
2.4
2.6
2.8
3.0
5:00 p.m. CET
Source: Thomson Reuters, Raiffeisen RESEARCH
Credit markets*
IG non-financial
High yield
Financials Senior
Financials Subord.
current
20-Jun 20131
Sep-13
Dec-13
105
479
111
327
110
490
130
350
115
520
140
360
Forecast
Mar-14
130
620
140
380
Jun-14
150
690
160
430
1
11:59 p.m. CET closing prices
* Option Adjusted Spread over Bund (in bp)
Source: Thomson Reuters, Raiffeisen RESEARCH
Jun-14
USA
Spread history IG vs HY bonds
2,400
2,100
1,800
1,500
1,200
900
600
300
0
400
350
300
250
200
150
100
50
0
2009 2010 2011 2012 2014
ML EUR IG Non-Financial spread index
ML EUR HY Non-Financial spread
index (r.h.s.)
20-Jun 20131
Forecast
Sep-13
Dec-13
Mar-14
Jun-14
16,000
10,000
15,000
9,000
14,000
8,000
2,586
2,600
2,850
2,900
2,800
DAX 30
7,928
8,000
8,500
8,700
8,600
FTSE 100
6,160
6,250
6,600
6,700
6,600
SMI
7,496
7,600
8,000
8,150
8,050
DJIA
14,758
15,000
15,500
15,800
15,500
12,000
S&P 500
1,588
1,610
1,680
1,710
1,680
11,000
Nasdaq Comp.
3,365
3,400
3,600
3,700
3,600
13,015
14,000
14,800
15,000
14,100
9,265
9,600
10,700
11,100
10,800
48,214
46,500
49,000
51,500
50,500
Bovespa
Jun-13
Source: Thomson Reuters, Raiffeisen RESEARCH
Euro STOXX 50
Hang Seng CE
Jun-12
DE
Dow Jones Industrials and DAX
current
Nikkei 225
Jun-11
Source: Bloomberg, BofA Merrill Lynch, Raiffeisen RESEARCH
Stock markets
Countries
0.5
Jun-10
Forecast
1
1.5
13,000
7,000
Forecast
10,000
Jan-12
Apr-13
DJIA
6,000
5,000
4,000
Apr-14
DAX (r.h. scale)
Source: Thomson Reuters, Raiffeisen RESEARCH
11:59 p.m. CET closing prices on the respective main stock exchange
Source: Thomson Reuters, Raiffeisen RESEARCH
1
3rd quarter 2013
5
Special
Emerging Markets – Is the party over?
 EM equity markets: underperformance driven by economic developments
 Extremely oversold conditions suggest low risk in EM equity markets
 Following the correction, EM bond markets remain on “Hold”
Monetary support & outperformance
140
12000
120
10250
100
8500
80
6750
60
5000
40
3250
20
1500
0
-250
Jun-08 Feb-10 Oct-11 Jun-13
Rel. performance *)
Central bank balance sheets, r.h.s.**)
*) Outperformance MSCI EM vs MSCI World, both performance indices in lokal currency
**) Sum of central bank balance sheets of USA, Euro
area, Japan, GB and Switzerland in USD bn
Source: Thomson Reuters, Raiffeisen RESEARCH
China’s economy dominating
60
125
55
115
50
105
45
95
40
Jun-08
85
Jan-10
Aug-11
Mar-13
Economic cycle**)
Rel. performance, r.h.s. *)
*) Outperformance MSCI EM vs MSCI World, both performance indices in lokal currency
**) PMI China, manufacturing (HSBC)
Source: Thomson Reuters, Raiffeisen RESEARCH
World economy highly correlated
200
180
160
140
120
100
80
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Rel. performance*)
MSCI cyclical vs defensive sectors
*) Outperformance MSCI EM vs MSCI World, both performance indices in lokal currency
Source: Bloomberg Raiffeisen RESEARCH
6
Economic performance in the Emerging Markets (EM) has become extremely important for international economic developments. The EM countries now account
for the production and consumption of 50% of global GDP, and more importantly
the EM will grow at an average rate of 5.3% this year, according to the IMF,
whereas the developed markets will only post growth of 1.5%. Nevertheless,
since October 2010, EM equity markets have lagged behind the developed
markets and were recently hit by massive selling pressure.
In our special analysis of this topic, we come to the conclusion that this is mainly
due to economic reasons. Naturally, the strong growth in money supply in the
developed economies supported all of the financial markets, but at least until
the end of May 2013 it had little to no impact on the outperformance or underperformance of the Emerging Markets. For instance, a comparison of the
outperformance of the MSCI EM in LCY terms with the MSCI World in LCY terms
shows strong correlation with the Chinese purchasing managers’ index, whereby
the equity market leads the purchasing managers’ index by two months. Another
factor supporting a move driven by economic factors is the correlation with the
performance of cyclical stocks to defensive stocks. The slump on the EM equity
markets in May was triggered by the uncertainty about the outlook for monetary
policy in the USA, but it is also very likely that it was further intensified by the
particularly restrictive monetary policy of the People’s Bank of China since the
end of May.
So, where do we go from here? EM equity markets are currently extremely
strongly underweighted in international portfolios, which at least indicates that
the risk of further massive declines is low. Nevertheless, we only expect to see
clear-cut outperformance versus the developed markets after there is clarity about
whether China’s economy will gain momentum again or whether monetary conditions will remain restrictive for a longer period of time.
In recent years, EM bonds have been among the top performers. Both in hard
currency and in local currency, they were able to post juicy gains against the
backdrop of falling inflation, improving ratings and stable to strengthening currencies. The mid-May flare-up in worries about a sudden end to the extremely expansive US monetary policy triggered a sell-off of EM bonds. The price losses for
these instruments were also exacerbated significantly by currency losses versus
the euro. EM bonds outside of the CEE region were generally hit harder, as these
countries are further along in the economic cycle and have already reached
or passed the low point in interest rates. By contrast, there should still be some
interest rate cuts in some CEE markets. In November 2012, we downgraded our
assessment of EM LCY bonds from Buy to Hold. On the one hand, the correction
in yields and currencies once again opens up larger yield differentials to hard
currency bonds, and on the other currency volatility will probably remain high, in
particular for non-European EM countries. All in all, we thus stick with our Hold
recommendation, despite the deterioration in fundamental conditions.
Veronika Lammer
3rd quarter 2013
Asset allocation – total portfolio
Balanced, rather than risk tolerant over the summer
 Talk of slowly reducing the flood of liquidity resulting in higher volatility on the markets
 Trough passed in low yields on safe-haven bonds
 Equities neutral versus bonds
Following a sharp setback on the equity markets in June,
investors are left feeling uncertain. One major reason
for this was the discussion about a possible reduction in
quantitative easing (QE) in the USA. In the months ahead,
we will see if the previously liquidity-driven markets can
transform into economically-driven ones. At any rate,
volatility rose with this sword of Damocles dangling over
the markets. With regard to the investment strategy, this
means that not only the equity segment, but also the bond
segment would be affected (winding down QE will automatically result in lower demand). Consequently, we see
the downside risk as being similar in both cases.
Portfolio weighting: overview
Alternative investments: 5%
(0 pp)
Bonds and money market:
45% ( +3 PP)
Stocks: 50% ( -3 PP)
Furthermore, we see a low likelihood of a sustained recovery in bonds. For government bonds, the bottom of the
trough in yields has been reached, as highlighted by the
recent increases in yield levels on safe-haven bonds such
as US Treasuries and German Bunds.
(+/-) change to last publication
Source: Raiffeisen RESEARCH
Bond portfolio Q2 2013
Money Market: 22.2% (
↓)
All in all, we have mixed expectations about the outlook
for the equity markets. While the performance seen on
the developed equity markets since the start of the year
certainly looks justified (high liquidity results in higher expected corporate profits) and will continue to have an effect over the medium term, stocks in the Emerging Markets
(EM) are lagging behind. Consequently, we opt for a neutral weighting on equities versus bonds and include 5% in
alternative investments. We would see any major declines
in prices during the third quarter as a good entry point for
increasing the ratio of equities.
Stefan Theußl
EWU-bonds: 22.2% ( ↓ )
Euro-corporate bonds:
11.1% ( ↓ )
USA: 26.7% ( ↑ )
Eurobonds: 4.4% ( ↓ )
Eastern Europe:
13.3% ( ↑ )
* compared to last publication, : higher weight, : lower weight, : unchanged weight
Source: Raiffeisen RESEARCH
Portfolio weighting in detail
Bonds and money market
Stocks
45% ( +3 PP)*
50% ( -3 PP)*
Alternative investments
5% ( 0 pp)*
EWU-bonds
22.2%

Europe
30.0%

Real Estates
USA
26.7%

USA
34.0%

Hedge Funds
Rest of Europe
0.0%

Asia
6.0%

Eastern Europe
13.3%

Eastern Europe
12.0%

4.4%

Emerging Markets
18.0%

11.1%

0.0%

22.2%

Eurobonds
Euro-corporate bonds
Asia
Money Market
Sum
100.0%
Sum
100.0%
Sum
100.0%
0.0%
100.0%
* compared to last publication, : higher weight, : lower weight, : unchanged weight
Source: Raiffeisen RESEARCH
3rd quarter 2013
7
Asset allocation – bonds
Selective approach in H2
 Yields on Western government bonds static over the short term
 CEE offers some opportunities thanks to isolated rate cuts and currency gains
 Money market investment as a hedge against risks
Historical performance
4%
2%
0%
-2%
-4%
YTD
in EUR
Source: Thomson Reuters, Raiffeisen RESEARCH
IG Fin
HY Non-Fin
IG Non-Fin
EB-CEE EUR
EM ex CEE
EB-CEE USD
Japan
CEE-Bonds
US-Treasuries
Euro area
Non Euro area
-6%
Over the last two months, massive price losses were registered on the government bond markets, due to fledgling optimism about the economic outlook and
rising expectations of an imminent reduction in the extraordinary monetary policy measures of the US central bank. With yields on 10-year US government
bonds now over 2.4% and 1.6% on German government bonds, however, we
believe the upward move in yields is over for the short term. We weight US highest at 26.7% and Eurozone government bonds at 23.8%, a by trend strong USD
should provide us with additional hedging against any unexpected price declines
on US sovereigns.
We weight Eastern European government bonds at 13.3% for the current period:
strong performance may be seen in the months ahead, thanks to prospects of a
rate cut here and there and waning political risks.
Eurobonds are an option for hedging against currency fluctuations, and we hold
a share of 4.4% of these instruments in the portfolio. Euro corporate bonds are
weighted moderately, at 11.9%, the high interest remuneration hedges us against
price losses resulting from increasing spreads. The relatively high 22.2% ratio
of money market holdings maintains our flexibility in the event of unexpected
(interest rate) developments.
Manuel Schuster
Correlations*
DE government bond
DE government bond
Euro corporate
bonds IG Non-Fin
Euro corporate
bonds IG Fin
Euro corporate
bonds HY
US-Treasuries
CEE-Bonds
1.00
0.82
0.66
-0.15
0.68
0.30
1.00
0.91
0.31
0.53
0.42
1.00
0.54
0.40
0.47
1.00
-0.17
0.24
Euro corporate bonds IG Non-Fin
Euro corporate bonds IG Fin
Euro corporate bonds HY
US-Treasuries
1.00
0.20
CEE-Bonds
1.00
*Historical, last 12 months
Source: Thomson Reuters, Raiffeisen RESEARCH
Expected bond market performance (%)*
3M
6M
9M
12M
EUR
LCY
EUR
LCY
EUR
LCY
EUR
LCY
DE government bond
1.0
1.0
-0.4
-0.4
-0.9
-0.9
-2.2
-2.2
Euro corporate bonds IG Non-Fin
1.2
1.2
0.0
0.0
-1.2
-1.2
-3.0
-3.0
Euro corporate bonds IG Fin
0.6
0.6
-0.6
-0.6
-1.0
-1.0
-2.5
-2.5
Euro corporate bonds HY
1.7
1.7
-0.1
-0.1
-4.0
-4.0
-7.2
-7.2
US-Treasuries
1.7
0.7
1.2
-0.5
-0.8
-1.7
-4.7
-2.7
CEE-Bonds
8.9
6.2
10.1
6.6
11.3
7.3
13.0
7.7
IG … Investment Grade, HY … High-Yield, LCY…local currency
* not annualised
Source: Raiffeisen RESEARCH
8
3rd quarter 2013
Asset allocation – equities
Stronger diversification is recommended
 Risk discount on equities in the Euro area is higher than in the USA over the medium term
 Renewed positions in Asia/Japan
 Emerging Markets only expected to improve in Q4
In Japan, political statements will now have to be followed by action. We believe
that the monetary politicy measures which have been taken will continue to be
beneficial for the Nikkei. Consequently, after closing the position to take profits
at the end of Q1, we re-open positions in Asia/Japan with a weighting of 6%.
We still project more JPY weakening and thus we strongly recommend currency
hedging for the entire position.
We lower the share of EM equities in the overall portfolio to 18%. First of all, the
currently high level of volatility is by no means commensurate with the projected
performance and secondly, most of the currencies are looking vulnerable, which
presents additional risks. As a result, we reallocate a part of this into the CEE
component (12%), which should profit from the prospective economic recovery in
the Euro area by the end of the year. The recommendations above (Japan added,
risk markets closer to each other) reflect a stronger diversification of the portfolio
and the risks, which is important in light of the elevated RBI risk indicator.
Stefan Theußl
Risk-return (%)
Expected return (%, 3 months)
The economy will now have to pick up in order to secure the good price performance seen on (established) equity markets. The USA will play the leading role
in this regard, before a mild economic recovery starts in the Euro area towards
the end of H2 and becomes visible next year. To reflect these trends, we retain
the weighting on the USA (34%), while slightly lowering the weighting on the
Euro area (30%).
4
S&P
500
2
DAX
FTSE
100
0
Nikkei
WIG
ATX
SMI
Euro
Stoxx
50
RTSI
BUX
-2
9
12 15 18 21 24 27 30 33
Historical volatility (%, 3 months)
Source: Thomson Reuters, Raiffeisen RESEARCH
Correlations
S&P
500
DJ Euro
Stoxx 50
Nikkei
ATX
0.53
0.90
0.26
DAX
0.66
0.94
0.29
FTSE 100
0.86
0.81
0.49
Nikkei
0.44
0.26
1.00
Euro Stoxx 50
0.63
1.00
0.26
S&P 500
1.00
0.63
0.44
SMI
0.77
0.74
0.39
RTSI
0.56
0.74
0.36
WIG 20
0.46
0.71
0.06
BUX
0.23
0.48
-0.10
Emerging Markets
0.68
0.60
0.46
Correlation (= reciprocal dependance) based on weekly
performance figures 1 year, in EUR
Source: Thomson Reuters, Raiffeisen RESEARCH
Expected stock market performance (%)*
3M
6M
9M
12M
EUR
LCY
EUR
LCY
EUR
LCY
EUR
Euro Stoxx 50
0.5
0.5
10.2
10.2
12.1
12.1
8.3
LCY
8.3
Germany
0.9
0.9
7.2
7.2
9.7
9.7
8.5
8.5
GB
-0.1
1.5
5.0
7.2
7.8
8.8
10.0
7.2
Switzerland
-0.6
1.4
4.7
6.7
4.1
8.7
2.9
7.4
Japan
2.5
7.6
4.2
13.7
1.0
15.3
-7.8
8.3
S&P 500
2.3
1.4
7.6
5.8
8.7
7.7
3.6
5.8
Russia
-0.7
-2.9
14.7
11.8
21.5
15.7
15.8
11.8
Poland
2.2
-1.2
13.9
8.8
22.2
15.3
19.1
9.7
Czech Republic
-0.8
-2.0
11.8
9.1
17.8
14.1
13.6
9.1
Hungary
-0.7
-2.3
11.0
11.0
12.8
14.7
7.6
9.4
Brazil
-0.2
-3.6
10.0
1.6
17.7
6.8
16.2
4.7
China
4.2
3.6
17.6
15.5
24.0
19.8
19.7
16.6
LCY…local currency
* not annualised
Source: Raiffeisen RESEARCH
3rd quarter 2013
9
Asset allocation – sectors
Expectations of sector rotation from defensive to cyclical
 Cyclical sectors should mostly outperform in the coming period
 Energy and industrials should see better-than-average performance
 The sectors consumer staples, healthcare, financials and telecoms are underweighted
Expected performance (%, 3 months)
Risk-return (in %)
6
5
Industrials
4
Health care
3
Utilities
2
Telecom
Consumer
staples
1
IT
Consumer
discr.
11
12
13
Historical volatility (%, 3 months)
Source: Thomson Reuters, Raiffeisen RESEARCH
RBI sector portfolio
120
0.50%
115
0.00%
110
-0.50%
105
-1.00%
100
01-Jan
-1.50%
01-Mar
01-May
RBI sector portfolio
Relative performance (r.h.s.)*
* in percentage points
Source: Thomson Reuters, Raiffeisen RESEARCH
Since May 13, the portfolio’s cyclical positioning has been very profitable, as the
RBI sector portfolio was 15.7bp higher than the benchmark. Since the beginning
of the year, the RBI sector portfolio is 20bp behind the benchmark on the whole,
mainly due to the unfavourable positioning in Q1. In absolute terms, the portfolio
has recorded an increase of 10.1% since the start of the year, with the last period
resulting in a decline of 4.7%.
Overweighting/underweighting
For the coming quarter (Q3 2013), we believe the equity markets will be very
volatile, particularly in the first half of the quarter, whereas prices may rise again
in the second half. Worries about a reduction in the US Fed’s bond purchases
should be replaced by signs of a broader global recovery in economic activity.
We basically take a rather cyclical stance in the portfolio, but at the same time
certain defensive sectors are expected to be stronger.
We overweight the energy sector most strongly, by 220bp. An overweight position is also taken on stocks in the industrials sector, as this sector stands to profit
from the anticipated economic rebound in the months ahead. The IT sector is
also overweighted, as it should profit from the attractive valuations. Consumer
discretionary should also post above-average performance and is overweight.
Good performance should be registered for utilities especially in the USA and
Japan, and we thus opt to overweight this sector despite its defensive qualities.
Amongst other things, materials continues to suffer from the lacklustre development of economic activity in China and the related weak demand for industrial
metals, prompting us to underweight this sector. The financial sector is also underweighted, as the tightening of regulations will restrain banks’ performance.
Consumer staples and healthcare are underweighted, due to the portfolio’s more
cyclical stance.
Nina Kukic
Top 10 industry performance in Q2 2013 (in %)
Automobiles
Semiconductors
Over-/underweight sectors (in bp)
Financials
Retailing
Utilities
Telecom
IT
Financials
Health care
Consumer staples
Consumer discr.
Industrials
Materials
Energy
-300
Source: Raiffeisen RESEARCH
10
Health care equipment
Insurance
Consumer durables
Software
Media
Pharma, biotech
-100
100
300
0%
2%
4%
6%
8%
10%
Performance during the previous quarter
Source: Thomson Reuters, Raiffeisen RESEARCH
3rd quarter 2013
Economy Euro area
Euro area working its way out of recession
 Economic sentiment surveys trending higher
 Peripherals to profit from rising exports and less restrictive fiscal policy
 No inflationary pressure in sight
Following a dip at the beginning of the spring, leading economic indicators for
the Euro area bounced back in Q2 2013. Surveys are now on an upward trend
again, confirming our forecast of a recovery in economic activity in the course
of the year. It is especially worth noting that the recent improvement in sentiment
reflected in the informative purchasing managers’ indices (PMI) is not restricted
to Germany, but rather applies to all countries in the Euro area, both in respect
of the manufacturing sector and the services sector. For instance, along with improvement in Spain and Italy, brighter sentiment was also registered in France,
whose economy currently also is in recession.
A combination of numerous factors is behind this sentiment brightening: first,
the negative impact of fiscal policy is fading, in part due to the success of the
consolidation measures which have already been undertaken, but also due to the
less strict approach being taken by the EU Commission in relation to the achievement of agreed deficit targets. Second, monetary policy in vast swathes of the
Euro area ensures cheap financing conditions. Third, real economic imbalances
have declined. This applies to cases of overshooting in the domestic economy
(e.g. real estate prices and residential construction activity), as well as to the
improvement of international competitiveness, and thus provides a foundation
for a sustainable recovery. On balance, we expect that rising exports will trigger
private investment, leading to the next step of higher employment and consumption (in 2014).
The forecast GDP contraction of around 0.7% yoy for the year 2013 in the Euro
area results from the poor performance in the first half of the year. The trailing
real data on the second quarter will thus still feature some significant declines on
a quarterly basis. This notwithstanding, the intensity of the decline in GDP should
generally be weaker than during the previous three-month period. We project
that after reaching a turning point in the third quarter production should begin to
increase (in quarterly terms) in most of the countries in the Euro area by the final
quarter of 2013 at the latest.
Price pressure remains low. Production capacities are more than adequate to
handle a pick-up in demand without any increase in inflation. Energy prices,
which have been declining for months now, also help to ease the tensions on the
cost side over the short to medium term. Nor is monetary policy generating any
foreseeable inflationary risks. The volume of private lending has been contracting for more than a year. Accordingly, the generous supply of liquidity from the
central bank is not leading to increased money supply in the real economy. The
rate of inflation should bottom out at around 1% yoy in the autumn and settle in
at well below 2% on average for this year and next year.
Gottfried Steindl, Eva Bauer
Leading indicators* have improved
65
60
55
50
45
40
35
2010
2011
France
2012
2013
Spain
Italy
* Purchasing managers‘ index - composite
Source: Markit, Raiffeisen RESEARCH
External imbalances are reduced*
10
5
0
-5
-10
-15
05 06 07 08 09 10 11 12 13
Italy
Portugal
Spain
Ireland
*Current account balance (% of GDP, rolling 4Q sum)
Source: Thomson Reuters, Raiffeisen RESEARCH
Inflation rates remain low
4.0
3.0
2.0
1.0
0.0
-1.0
2009
2010
2011
2013
2014
Consumer price index - core rate (% yoy)
Consumer price index (% yoy)
Source: Thomson, Reuters, EU Commission, MEF,
Raiffeisen RESEARCH
3rd quarter 2013
11
Economy USA
Upswing expected after a long, hard summer
 Slower build-up of inventories and weaker increase in private consumption will hamper economic growth in the summer
 No further obstacles to a sustained upturn starting from the autumn, as negative impact of fiscal developments fades
 Labour market remains moderately positive; roughly 7% rate of unemployment at end-2013
In May, the ISM manufacturing index slumped to 49.0 points, hitting the lowest level since June 2009. Nevertheless, we do not read this as a sign that the
broader economy is headed for a soft patch. For us, this appears to reflect specific weakness in manufacturing itself, which stems first and foremost from the
slowing pace of exports. This assessment is supported by the fact that sentiment
improved in May both in the service sector, according to the relevant ISM index,
and among small and medium-sized companies, according to the NFIB survey.
The companies involved in these last two surveys are far less dependent on exports than most of the globally active corporations which participate in the survey
for the ISM’s manufacturing index.
GDP real, % qoq, annualized
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
-8.0
-10.0
Q1 07
Q3 08
Q1 10
Q3 11
Q1 13
Real GDP (% qoq, annualised)
% yoy
Source: Markit, Raiffeisen RESEARCH
Labour market
11.0
1,000
10.0
500
0
8.0
-500
7.0
-1,000
6.0
-1,500
Forecast
9.0
5.0
-2,000
4.0
Q1 07 Q1 09 Q1 11 Q1 13
-2,500
Non-farm payrolls (qoq, thsd, r.h.s.)
Unemployment rate (%)
Source: Thomson Reuters, Raiffeisen RESEARCH
Inflation
Forecast
6.0
4.0
2.0
0.0
-2.0
-4.0
07
08
09
10
11
12
13
CPI* (% yoy)
CPI core rate (% yoy)
* Consumer price index
Source: Thomson Reuters, Raiffeisen RESEARCH
12
14
According to the second estimate, annualised real GDP growth in Q1 amounted
to 2.4% qoq, but we expect a weaker increase in economic output in the second
and third quarter. On the one hand, the strong Q1 growth contribution from inventory investment will be reduced by the slower build-up of inventories, and on
the other hand, we project a slower increase in private consumption spending.
The monthly data on personal consumption expenditure which are available so
far point to an annualised quarterly increase of 2.6% for the period April-June,
lower than the 3.4% rate recorded in the first quarter. Above and beyond this,
public spending will also hamper the expansion of gross domestic product, due
to the automatic spending cuts which entered into effect on March 1 this year.
We expect to see a sustained recovery in economic activity starting from the
autumn.
The labour market report for May was not particularly interesting. In net terms,
175K new jobs were created, which is essentially exactly the same as the average figure for the last twelve months. The rate of unemployment advanced by 0.1
percentage point to 7.6%, thus presenting no cause for concern. First, looking at
the figure in the second decimal place, the increase was smaller than reported
(7.56% from 7.51%). Second, according to the household survey in May, the
number of employed increased for the second month in a row by around 300K,
and thus the increase in unemployment rate was driven “solely” by an increase
in the participation rate. Third, the rate of unemployment had declined by 0.4
percentage points in the preceding four months. In light of our expectations that
the economy will go through a weaker period in the second and third quarter,
the increase in employment may continue to be modest until the autumn, similar
to what was seen in March and April (average employment gains of 155K). Nevertheless, this is nothing more than just a small dent in the recovery on the labour
market. Consequently, we stick by our assessment that the rate of unemployment
will be just slightly higher than 7% at the end of the year.
May inflation accelerated from 1.1% yoy to 1.4% yoy, but the low point for the
year should only be reached in the autumn, when the rate falls to below 1%
yoy. The core rate, which excludes energy and food, should decline from the
current 1.7% yoy to 1.5% yoy by year-end.
Jörg Angelé
3rd quarter 2013
Special USA
Fed lets the cat out of the bag
 Winding down QE3 looks like a done deal: bond-buying programme to end by mid-2014
 Key rate to be left at just over 0% until mid-2015 at least
 Fed must be careful not to fall behind the curve, as new imbalances may develop otherwise
The FOMC meeting on June 19 ended without any real surprises. The statement
published following the monetary policy meeting featured nearly the same wording as on May 1. The only newly added point was the statement that downside
risks to the economy and the labour market had declined since last autumn.
The really exciting part thus started at the press conference with Fed President
Bernanke. He announced that, the Fed – provided that the economy and the
labour market will develop in line with monetary authorities’ expectations – will
start cutting back on bond purchases “later this year”. The purchases would not
be reduced suddenly, but rather lowered in several steps before being completely
terminated by mid-2014. We assume that the first reduction of bond purchases
will be announced at the rate-setting meeting after next, on September 18, or by
the meeting on October 30 at the latest. Following that, QE 3 will be gradually
reduced at each subsequent meeting until on April 30 or June 18, 2014 they are
reset at zero. This reduction is likely to take place in steps of USD 15 bn.
Chairman Bernanke’s comments on the key rate, however, seemed more interesting to us than the schedule for winding down QE3, as in that regard we had
roughly expected an approach of this kind. Bernanke repeated something that
has been heard frequently in the past: interest rates will only be raised well after
the end of the bond purchase programme and not before the unemployment rate
sinks to 6.5%, which is projected to occur in mid-2015. These conditions were
initially communicated in December 2012. It is surprising, however, that since
then the monetary policy committee’s projection for the rate of unemployment at
end-2014 has fallen by 0.4 percentage points to 6.7% and the forecast for end2015 has declined 0.3 percentage points to 6.0%. This in turn means that most
FOMC members clearly anticipate the unemployment rate to drop to 6.5% as
early as the end of 2014 or early in 2015. When asked about this contradiction,
Bernanke explained that the figure of 6.5% should be understood as a threshold,
after which interest rate hikes were possible but it should not be viewed as an automatic trigger for rate hikes. According to Bernanke, there was a broadly held
opinion in the committee that the key rate would only be increased a few quarters
after this threshold was crossed. This statement, however, stands in contradiction
to the key rate anticipated by FOMC members for end-2015. In the meantime,
nine of the 19 members expect that a key rate of at least 1.25% in December
2015. As rates should be increased very cautiously according to Bernanke, i.e.
in 25-bp steps, rate hikes would have to start at the meeting to be held at the end
of July 2015 at the latest.
Based on the above considerations, we believe it is likely that the Fed will not
start normalising the key rate in mid-2015 at the earliest, but rather at the latest.
In light of the anticipated trajectory of the economy and labour market, it would
also be a very good idea to start returning interest rates to a normal level at an
earlier point in time. Even a key rate of 1% has an extremely accommodating
effect, and one must take into consideration that the impact of monetary policy
decisions is delayed by at least four quarters. If the Fed leaves the key interest
rate too low for too long, it runs the risk of “falling behind the curve”, and new
asset price bubbles as well as economic overheating.
Jörg Angelé
3rd quarter 2013
Fed to step off the gas only slowly
180.0
170.0
160.0
150.0
QE2
140.0
130.0
120.0
QE3
110.0
100.0
90.0
Jun-10 Jun-11 Jun-12 Jun-13 Jun-14
Fed´s bond purchases (index 28 June
2010 = 100)
Source: Thomson Reuters, Raiffeisen RESEARCH
Fed forecast unemployment rate 2014*
7.8
7.6
7.4
7.2
7.0
7.3
7.4
7.2
7.1
7.1
6.9
7.0
6.8
6.7
6.6
6.4
Nov-11
Apr-12
low
Sep-12
high
Mar-13
average
*quarterly average 4th quarter 2014; central tendency
Source: FRB, Raiffeisen RESEARCH
FOMC Fed Funds Target Rate end 2015*
5.0
4.0
3.0
10 ≥ 1.0 %
13 ≥ 1.0 %
2.0
1.0
0.0
March 2013
June 2013
*each dot marks the expectation for the Fed Funds Target
Rate at the end of 2015 of one of the 19 FOMC members
Source: FRB, Raiffeisen RESEARCH
13
Interest rates
Central banks: Drifting apart
 Euro area: Reduction of surplus liquidity
 GB: QE tapering not an issue yet
 Switzerland: Steady course
Money market rate 3M (%)
2.0
Forecast
1.5
1.0
0.5
0.0
Jun-10
Jun-11 Jun-12
EUR
Jun-13 Jun-14
USD
Source: Thomson Reuters, Raiffeisen RESEARCH
Money market rate 3M (%)
Forecast
0.3
0.2
0.1
0.0
Jun-10
Jun-11
Jun-12
Jun-13
CHF
Jun-14
JPY
Source: Thomson Reuters, Raiffeisen RESEARCH
Key interest rate (%)
Countries
20-Jun1 Sep-13
Dec-13 Jun-14
Euro area
0.50
0.50
0.50
0.50
GB
0.50
0.50
0.50
0.50
CH
0.02
0.00
0.00
0.00
Japan
0.10
0.10
0.10
0.10
USA
0.25
0.25
0.25
0.25
5:00 p.m. CET
Source: Thomson Reuters, Raiffeisen RESEARCH
1
Money market rate 3M (%)
curr
Sep-13
Dec-13
Jun-14
20-Jun1 Forc Fwd Forc Fwd* Forc Fwd*
EUR
0.21 0.25 0.28 0.30 0.36 0.35 0.52
CHF 0.02 0.00 0.00 0.00 0.02 0.00 0.09
USD 0.27 0.25 0.29 0.30 0.35 0.30 0.48
GBP 0.51 0.50 0.52 0.50 0.57 0.60 0.71
JPY
Leading economic indicators were recently more upbeat, prompting the European Central Bank to distance itself from another cut in interest rates in June.
At the same time, ECB chief Draghi was surprisingly clear in stressing that – in
the event of a deterioration in the economic outlook – plans call for lowering the
main refinancing rate and probably the deposit rate as well (to below 0%!). In
light of the clear statement by the ECB, the question of whether or not there will
be another rate cut will have to be constantly re-evaluated during the summer,
based on the incoming data. While we expect to see weak data on the real
economy, such as the results for industrial production, these figures pertain to the
months gone by. Forward-looking indicators such as business confidence surveys
should reflect improvement. Thus, there probably will not be any triggers for
renewed speculation about possible rate cuts. We project that interest rates will
remain unchanged and in particular that the deposit rate will not sink below 0%.
Viewed in this light, we hardly see any more room for Euribor rates to go lower.
Instead, these rates probably now have their lows behind them and should begin
to move slowly higher in small steps. After all, thanks to early repayments the
overhang of unused liquidity is steadily falling (from EUR 630 bn at the beginning
of the year to the recent level of EUR 280 bn). During the autumn, the ECB will
finally give up its current willingness to lower interest rates once and for all.
The Bank of England (BoE) may not go this far in the next few months. On the
contrary, despite the recent improvement in economic prospects, it is maintaining its expansive stance. In July, the new BoE central bank governor Carney
will not bring any change in policy along with him, but the BoE’s focus could
shift. Carney is seen as a proponent of “conditional monetary policy guidance”.
This means that monetary policy measures are conditional on certain macroeconomic thresholds being reached (inflation target and employment target). The
advantage of such a policy strategy is that markets can be sure that interest rates
will remain low for a long period of time. With regard to the given interest rate
conditions, this would mean a low key rate for the time being (until sometime in
2015).
The latest meeting of the Swiss National Bank (SNB) also reflected little interest in
changing anything in Swiss monetary policy. The corridor for the 3-month Libor
remained unchanged at 0-0.25% and there are no plans to change the EUR/
CHF limit of 1.20. CHF appreciation would be equivalent to tighter monetary
conditions, and this is not desirable in light of the risks (global economic conditions, global financial markets and risks in the domestic real estate market). The
SNB’s policy will be continued until well into 2014.
Gottfried Steindl, Lydia Kranner
0.15 0.10 0.15 0.10 0.15 0.10 0.17
5:00 p.m. CET;
Forc ... Forecast, Fwd ... Forward
Source: Thomson Reuters, Raiffeisen RESEARCH
1
14
3rd quarter 2013
Yield forecast
Support from US Fed begins to fade
 Euro area: Safe-haven government bonds under pressure
 Euro area: Improving economic outlook lowers risk premiums
 USA: Schedule for exiting QE3 should initially ease pressure on government bonds, but yields significantly higher in mid-2014
Under normal circumstances, the beginning of an economic recovery results in
rising yields on government bonds. This time, however, the projected increases
are limited. German government bonds are one of the first parking places used
for the surplus EUR liquidity in the financial system. The ECB’s expansive monetary policy and capital inflows from other currency areas (Japan) will help to alleviate the upward cyclical pressure. At the same time, surplus liquidity in the Euro
area is gradually being scaled back and thus support for safe havens is waning.
Following the traditionally quiet summer period, another upward shift in German yields can be expected. As prospects improve risk premiums will continue
to fall, in particular for the peripheral countries of Italy and Spain, which are
working their way out of the recession. For Spanish bonds, the positive trend will
continue in the coming quarters, even though the decline in risk premiums should
gradually slow down. In Italy, the renewed risk of new elections may interrupt the
economically-induced decline in spread around the turn of the year. In respect of
Austrian bonds we only see limited potential for further spread narrowing, due to
the already extremely low levels. By contrast, French bonds in particular stand to
profit disproportionately from the inflows of capital from Japan.
Value matrix bonds
Markets
DE
GDP growth
Inflation
Budget
Currency
Politics
Short rates
Technical
Average
US
JP
4 (3)
2
(3)
1 (1)
3
(2)
1 (1)
2
(3)
2 (2)
2
(3)
3 (3)
3
(3)
1 (1)
1
(1)
3 (2)
4
(4)
2.1 (1.9) 2.4 (2.7)
2
2
4
3
2
1
3
2.4
(1)
(1)
(4)
(3)
(2)
(1)
(1)
(1.9)
Explanation: 1 (4) denotes highly positive (negative) influence on the market. All factors are weighted equally.
Assessments refer to a 3-month period. Values in brackets refer to the previous quarter.
Source: Raiffeisen RESEARCH
Yields 10Y (%)
4.0
Forecast
3.5
3.0
2.5
Since the beginning of May, yields on 10-year US government bonds have increased by 80bp to 2.5%. At the latest rate-setting meeting, Bernanke made it
quite clear that the decision on the timing and scope of the reduction in bond purchases depended very strongly on the data. We expect that market participants
will scrutinise the economic indicators being released in the months to come even
more closely than they did in the past. This will probably make the path of yields
rather volatile, as there are bound to be occasional bits of bad news as well. As
the exit from QE3 has now been outlined and Bernanke has once again clearly
stated that rate hikes will not be an issue for a long time to come, the upward
push in yields will probably run out of steam. Accordingly, looking ahead towards the autumn we do not expect to see any further sustained declines in prices
of US government bonds. This does not change our assessment that yields will be
significantly higher than the current levels by mid-2014.
2.0
1.5
1.0
Jun-10
Jun-11 Jun-12
DE
Jun-13 Jun-14
USA
Source: Thomson Reuters, Raiffeisen RESEARCH
Range yields 10Y (%)
Countries
DE
USA
GB
Japan
Sep-13
1.2
2.2
1.8
0.5
-
Dec-13
2.0
3.0
2.4
1.0
1.4
2.4
1.8
0.5
-
2.2
3.2
2.5
1.1
Jun-14
1.6
2.5
1.9
0.7
-
2.5
3.5
2.8
1.5
Source: Raiffeisen RESEARCH
Gottfried Steindl, Jörg Angelé
Yields 10Y (%)
20-Jun 20131
Countries
Sep-13
Dec-13
Mar-14
Jun-14
Forecast
Cons*
Forecast
Cons*
Forecast
Cons*
Forecast
Cons*
Austria
2.09
1.95
n.v.
2.10
n.v.
2.20
n.v.
2.40
n.v.
Germany
1.67
1.60
1.50
1.80
1.70
1.90
1.90
2.10
2.00
France
2.26
2.10
2.10
2.30
2.10
2.40
2.30
2.60
2.40
Italy
4.57
4.20
4.50
4.50
4.45
4.60
4.50
4.60
4.50
Spain
4.87
4.60
4.80
4.60
4.50
4.60
4.70
4.70
4.50
GB
2.30
2.20
2.00
2.20
2.20
2.40
2.41
2.60
2.30
Switzerland
0.96
0.70
0.83
0.90
0.93
1.00
1.00
1.10
1.00
Japan
0.86
0.80
0.75
0.80
0.70
0.90
0.80
1.00
0.80
USA
2.40
2.40
2.20
2.60
2.40
2.80
2.50
3.00
2.70
5:00 p.m. CET * Cons... Consensus estimates
Source: Thomson Reuters, Bloomberg, Raiffeisen RESEARCH
1
3rd quarter 2013
15
Currency trends
EUR/USD: Announced QE3 tapering should bolster USD
 Yield difference continues to be the No. 1 driver for the EUR/USD exchange rate
 Fed’s tapering of QE3 should result in a modest advantage for USD until year-end
 GBP looks weak
EUR/USD
Forecast
1.55
1.45
1.35
1.25
1.15
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Source: Thomson Reuters, Raiffeisen RESEARCH
EUR/GBP
Forecast
0.95
0.90
0.85
0.80
0.75
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Source: Thomson Reuters, Raiffeisen RESEARCH
Changes in the yield differential between 2-year German and US government
bonds continue to provide an excellent explanation for the development of the
EUR/USD exchange rate. Following the US Fed’s June 19 announcement of a
slow withdrawal from QE3, the yield differential should open up slightly in favour
of the US dollar in the months ahead. Consequently, we project mild appreciation of USD in the coming months. We forecast the low of EUR/USD around the
end of the year. All in all, the range of volatility in the pair should remain limited,
as was the case in H1. One specific event risk is the ruling of the German constitutional court on the legality of unlimited government bond purchases by the ECB,
which is expected around the end of the year. If, contrary to the expectations, the
judges come to the conclusion that such purchases violate Germany’s Basic Law,
the market will raise some very, very serious questions about Outright Monetary
Transactions (OMT). This might result in a re-escalation of the Euro area debt
crisis, with all of its ramifications such as massive increases in peripheral country
spreads. In such a scenario, the euro would certainly fall to well below EUR/
USD 1.20.
EUR/GBP: Safe haven in doubt
The path of the GBP exchange rate is determined by the better economic data
coming from the UK and non-domestic topics, such as the discussions of winding
down the QE3 programme by the Fed and thus also by the USD. In relation to
EUR, GBP has moved in a relatively stable range of 84 to 86 pence in the last
three months. In the forecasting period ahead, this trading range will probably
shift higher. Reasons for this include 1) the aspect that the pace of UK growth is
slower than in the USA; 2) the yield differential will probably widen in the favour
of the Americans; and 3) while the Fed is publicly pondering a reduction of the
bond purchase programme, after new Governor Carney takes over in July, the
BoE will be wondering about whether or not more expansive monetary policy
measures should be taken, and if so, how expansive they should be. The GBPweakening versus the USD that stems from this will likely be transmitted to EUR/
GBP as well.
Jörg Angelé, Lydia Kranner
Currencies: FX per EUR
20-Jun 20131
Countries
Sep-13
Dec-13
Mar-14
Jun-14
Forcast
Fwd*
Forecast
Fwd*
Forecast
Fwd*
Forecast
Fwd*
USA
1.32
1.31
1.32
1.30
1.32
1.31
1.32
1.35
1.32
Switzerland
1.23
1.25
1.23
1.25
1.22
1.28
1.22
1.28
1.22
129
135
129
140
129
147
129
151
129
GB
0.85
0.87
0.85
0.87
0.85
0.86
0.86
0.83
0.86
Norway**
7.94
7.45
7.97
7.43
8.00
7.40
8.03
7.38
8.05
Sweden**
8.72
8.46
8.74
8.42
8.76
8.37
8.78
8.31
8.80
Japan
5:00 p.m. CET * Fwd…forward rates
** Consensus estimates
Source: Thomson Reuters, Raiffeisen RESEARCH
1
16
3rd quarter 2013
Currency trends
CHF: Easing, JPY: Finished with depreciation?
 CHF: No change in existing strategy of the Swiss National Bank (SNB)
 Turbulence on the JPY market
 JPY depreciation only a matter of time
EUR/CHF*
Forecast
1.1
1.2
1.3
1.4
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
*inverted
Source: Thomson Reuters, Raiffeisen RESEARCH
USD/JPY*
75
80
Forecast
The Swiss franc has held its ground relatively well in the trading range which we
forecast. The reasons for the wave-like moves are the usual ones: uncertainty in
the Euro area triggers CHF appreciation, whereby the franc has not been able
to strengthen to below 1.21 anymore in the recent past. CHF weakening tends
to be ushered in by calmer conditions on the international stage, in conjunction
with prospects for normalisation of the economic environment in the Euro area,
but EUR/CHF has not been able to break through 1.26.
Consequently, the trend we project over a one-year horizon has not changed.
We stick to our targets of EUR/CHF 1.25 by year-end and 1.28 by the middle
of next year. In order for more significant CHF weakening to occur, there would
have to be some initial talk of rate hikes in the Euro area, leading to a significant
widening of the interest rate differential, but this is a scenario for the distant future
right now.
The SNB will continue to pursue its existing monetary policy strategy and recently
confirmed again that it would spare no efforts in defending the EUR/CHF 1.20
line. As economic recovery progresses and inflation readings turn positive again,
debates about “normalisation” will pick up in Switzerland as well. We do not
expect to see this occur until late 2014 however.
The fluctuations in JPY can perhaps best be compared to a roller-coaster ride
right now. In May, the yen depreciated all the way to 103 against USD, but this
was promptly followed by a countermove which sent the yen back to 94 against
USD in recent weeks. Currently, the rate is hovering around 97 (in line with our
forecast), due to disappointment about the cautious statements by the BoJ (Bank
of Japan) in relation to further measures to limit upward pressure on yields, disappointment about the statements related to the economic programme and finally
the flood of capital exiting the Emerging Markets due to the Fed’s statements. In
terms of economic policy, absolutely nothing has changed in Japan, and we thus
stick to our longer-term scenario calling for currency depreciation.
The differences in the development of monetary aggregates which are responsible for the JPY weakness will become even more evident when the Fed starts
making specific announcements about winding down its QE programme. Inflation expectations will also continue to weaken the yen. Accordingly, it is only a
matter of time before USD/JPY once again advances past the 100 line.
Lydia Kranner
85
90
95
100
105
110
115
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
* inverted
Source: Thomson Reuters, Raiffeisen RESEARCH
Value matrix FX
Markets
USD
CHF
GBP
Historical volatility FX
JPY
GDP growth
2
(2)
2
(3)
3
(4)
4
(3)
Countries
90 days
180 days
Short rates
4
(4)
4
(4)
4
(4)
4
(4)
USA
8.10%
7.71%
Long rates
2
(2)
4
(4)
3
(3)
3
(3)
GB
7.04%
7.10%
Credibility
2
(2)
1
(1)
3
(2)
3
(3)
Switzerland
5.33%
4.65%
PPP
3
(2)
3
(3)
2
(2)
2
(2)
Japan
15.48%
14.27%
Current acc.
3
(3)
1
(1)
3
(3)
2
(2)
Norway
8.06%
6.66%
Technical
1
(4)
2
(3)
2
(3)
3
(4)
Sweden
7.26%
6.41%
Average
2.4
(2.7)
2.0
(3.0)
2.7
(3.0)
2.9
(3.0)
Czech Republic
4.72%
4.55%
Explanation: 1(4) denotes appreciation (depreciation) pressure on the currency. All factors are weighted equally. Assessments refer to a 3-month period. Values in brackets refer to the previous quarter.
Source: Raiffeisen RESEARCH
3rd quarter 2013
Explanation: annualised standard deviation
Source: Thomson Reuters, Raiffeisen RESEARCH
17
Corporate bonds: Non-Financials
Corporate Bonds – The end of the cycle draws closer
 Widening spreads for corporate bonds since mid-May
 Primary market cools off; 3.6% global default rate expected per end-2013
 Outflows on the HY market, volatility on the rise especially on the CDS market
US Fed chief Ben Bernanke’s speech to Congress on
22 May brought with it a correction in risky asset classes.
The head of the US Fed, also the most important provider
250
of liquidity for financial markets, announced that the Fed
wishes to begin closing the tap on the massive amount of
200
bond purchases thus far made. When exactly and how
150
much will be scaled back is unknown, which is spreading the headaches among market participants around.
100
The primary influencing factors for further action from the
50
US central bankers are on the one hand economic indicators such as the ISM index and on the other hand labor
0
market data. “Tapering on or off” is also setting the tone
Jan-08
Nov-08 Oct-09
Sep-10 Aug-11
Jul-12
Jun-13
on credit markets, on which risk premiums for corporate
ML EUR IG Non-Financial Spreadindex (ASW)
iTRAXX Europe index
bonds climbed since 22 May; high yield is up from 403bp
Source: Bloomberg, BofA Merrill Lynch, Raiffeisen RESEARCH
to 479bp and investment grade from 93 to 105bp. As per
20 June, the returns on high yield investments was 1.72% (performance on index
level) while investment grade investments brought a mere 0.30%.
Yield EUR IG non-financial
IG cash vs iTRAXX Europe
in bp
300
8%
7%
6%
5%
4%
3%
2%
1%
0%
01
03
05
07
09
11
13
Yield ML EUR IG Non-financial index
Source: Bloomberg, BofA Merrill Lynch, Raiffeisen
RESEARCH
Credit spreads
20-Jun1
Corp. Bonds (IG)
Yield Duration
106
2.1 %
4.8
AAA
29
2.0 %
8.7
AA
38
1.6 %
5.4
A
66
1.7 %
5.0
BBB
151
2.5 %
4.5
Corp. Bonds (HY)
482
5.7 %
3.3
20-Jun2 Sep-13
Jun-14
Swapspreads (10Y)
EUR
29
35
45
US
22
25
35
1
11:59 p.m. CET closing prices, Option Adjusted
Spread (OAS) in basis points
2
prices as per 20 June 2013, 11:00 a.m. CET
Source: Bloomberg, BofA Merrill Lynch, Raiffeisen
RESEARCH
18
The reason why we’re providing so much attention to the decisions of central
banks is that spread products such as corporate bonds and their derivatives
will be influenced by them to a great degree in the coming months. To be more
precise: we feel that development in US benchmark yields will be at this time the
largest influencing factor for credit markets. As long as US benchmark yields are
on the rise, we feel that German government bonds will also be confronted with
higher yields in the wake of this development, although the European Central
Bank is tending more towards slashing interest rates further rather than adopting
a stricter monetary policy. Corporate bonds could see selling pressure coming
from two directions. Firstly, a sign that the money fountain is losing pressure could
lead to a correction in risky assets, which would especially affect high yield issuers. Secondly, and this argument takes the same line, given that risk premiums
are so low, any rise in benchmark yields cannot simply be absorbed. In fact, the
exact opposite could happen: losses in government bonds lead to rises in risk
premiums for corporate bonds. This would then be doubly bad and would especially hit investment grade bonds, which carry a smaller risk buffer.
The uncertainty, measured in volatility, has risen on credit markets and one can
especially see this on the derivative market. In our opinion, current positions in
investment grade corporate bond portfolios are going to initially be primarily
backed up with synthetic CDS index products, rather than a reduction in these
positions. Thus, risk premiums on the CDS market have risen, while investment
grade corporate bonds have received less negative attention. In the corporate
high yield segment this is not the case. The risk premiums of these bonds are
climbing strong along with CDSs. We expect that the primary market for high
yield issuers will cool off over the summer and, if this remains true for a longer
time, several companies will face problems. Already this year EUR 112 bn in
3rd quarter 2013
Corporate bonds: Non-Financials
non-financial corporate bonds have been placed on the primary market, of which
EUR 86 bn are investment grade and a respectable EUR 26 bn are from the high
yield segment. In Europe, the high yield default rate rose sharply from 2.0% in
April to 2.9% in May! The global high yield default rate is currently at 2.8%. We
expect a default rate of 3.6% by the end of the year.
In % of issuer
Global default rates
16
14
12
10
8
6
4
2
0
%
%
%
%
%
%
%
%
%
1998 2001 2004 2007 2010 2013
in EUR bn
We do not want to draw a purely negative picture, but merely call attention to
the fact that there are no satisfactory alternatives from a risk/return perspective.
One must differentiate between institutional spread investors or private yield inMoody's Global Speculative Default Rate
vestors. On a spread basis that affects the risk premiums for corporates, we do
Moodys Forecast May 2014
not see any sell-off over the summer. Investors that do not hedge their corporate
Source: Moody‘s, Raiffeisen RESEARCH
bond positions should, due to the already described scenario, definitely consider
reducing their expensive and/or risky high yield bond poRedemptions vs issuances*
sitions. The first signals can be seen in outflows in ETFs
300
(exchange-traded funds) and the high yield segment will
250
be the hardest hit here. In the first two weeks of June, EUR
309 mn and EUR 360 mn, respectively, flowed out of the
200
European high yield segment. Since 2005, this is the third
150
and fourth largest liquidity outflows per week. The liquidity that has been pulled out in this segment amounts to only
100
23% of inflows, though.
50
Issuances HY
Redemptions IG
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
Issuances IG
Redemptions HY
* as of 20 June 2013
Source: Dealogic, Raiffeisen RESEARCH
Credit forecasts*
current
Forecast
20-Jun1
Sep-13
Dec-13
Mar-14
Jun-14
IG Non-Fin
105
110
115
130
150
High-Yield
479
490
520
620
690
Financials Senior
111
130
140
140
160
Financials Subord.
327
350
360
380
430
11:59 p.m. CET closing prices ; * Option Adjusted Spread (OAS) in bp
Source: Bloomberg, BofA Merrill Lynch, Raiffeisen RESEARCH
1
Spread history IG vs HY
400
2,400
350
2,100
300
1,800
Forecast
Manuel Schreiber
0
2005
Fundamental and economic indicators are being understood at this point as only notes in the margin, but in our
opinion will gain importance in the coming months. As
monetary policy begins to tighten and the liquidity pullout starts, the technical support could lose influence as a
positive counterweight. In all, we feel the credit market to
be expensive. As we wrote in the last strategy publication
three months ago, credit markets are closing in on the
end of the cycle. We assume that spreads have already
reached their lowest points and expect them to rise again
by the end of the year. In a single quarter perspective,
we expect a continuation of the current trend and thus
expect moderate widening in spreads.
250
200
1,500
1,200
150
900
100
600
50
300
0
2009
0
2010
2011
2012
2014
ML EUR IG Non-Financial spread index
ML EUR HY Non-Financial spread index (r.h.s.)
Source: Bloomberg, BofA Merrill Lynch, Raiffeisen RESEARCH
3rd quarter 2013
19
Corporate bonds: Financials
European banking union: A very ambitious project
 New regulations have a significant impact on prices of bank bonds
 Segmentation of the European banking landscape (North/South) may increase again
 In the future, subordinated and senior bonds of struggling banks will participate more often in losses
Distribution of losses*
Depositor Preference
Deposits < EUR 100.000
Some of deposits > EUR 100.000**
Deposits > EUR 100.000
The European banking union continued to be a topic of discussion in the last few
days of the last quarter and will remain a topic in the present quarter as well. The
three main components in introducing the banking union are 1) single supervisory mechanism; 2) single resolution mechanism; and 3) joint deposit insurance.
EU negotiations on a uniform mechanism for winding up insolvent banks turned
out to be very difficult at a meeting of finance ministers at the end of June.
Senior Unsecured bonds
Put simply, the main issue in relation to the planned mechanism for bank insolvency is who will bear the costs for a bank bail-out, and starting from when and
to what extent. Using direct aid for banks (from the Euro area bail-out fund ESM),
the goal is to prevent the financial problems of banks from resulting in an explosion in the debts of individual countries. With the Crisis Management Directive,
an attempt is also made to minimise the costs to the taxpayers. The elements involved are relatively closely related: low ESM volumes for direct recapitalisation
of banks, a later start to such bank recapitalisation, use of the bail-out funds for
“old cases” and limiting the participation of the home country of the struggled
bank in the bail-out means that the funding must come from other sources.
Subordinated bonds
Shares
* this is one of possible distribution of losses
** for example deposits of private individuals
Source: Raiffeisen RESEARCH
Core Banks vs. Peripheral Banks
An agreement on where such funding should come from is difficult due to the differing capital structure of banks in the individual countries and the corresponding
differences in the vested interests in the individual countries.
750
500
250
Current Spread
Bank of Ireland
Dexia
Caixa Geral
Santander
RBS
Unicredit
BNP
Danske Bank
0
Deutsche Bank
5Y CDS Senior in BP
1000
Min / Max (1 Year)
Source: Bloomberg, Raiffeisen RESEARCH
Spreadhistory Senior vs Subordinated
Forecast
400
350
300
250
200
150
100
50
0
2009 2010 2011 2012 2014
2,400
2,100
1,800
1,500
1,200
900
600
300
0
ML EUR IG Non-Financial spread index
ML EUR HY Non-Financial spread index
(r.h.s.)
Source: Bloomberg, BofA Merrill Lynch, Raiffeisen RESEARCH
20
One central aspect is the decision on the point in time when a bail-in should be
introduced and on the sequence in which owners and creditors should be asked
to pay up.
A “bail-in” means that owners and bond creditors (must) forego their claims,
without supporting the bank with taxpayer’s money. As only very few of the currently outstanding bank bonds mature after 2018, we expect that one logical
consequence will be the drawing forward of the bail-in from 2018 (original proposal) to 2015-2016. As for the sequence of participating in losses, we expect to
see preferential treatment for deposits (Depositor Preference) compared to senior
unsecured bonds. Clearly, there is an attempt to avoid the participation of smaller
deposits (less than EUR 100,000) in our opinion, whereby at least part of the
higher deposits will also be treated preferentially.
We see any delays to introducing the banking union as a negative development for banks from the peripheral Euro area countries. We recommend overweighting bonds of stable European banks from core European countries. We
prefer these banks’ subordinated bonds compared to senior instruments, as we
no longer assume that senior bonds are untouchable in Europe. Our general
recommendation over a horizon of the next three and next 12 months is nevertheless Sell for both segments (subordinated, senior), as we expect stronger risk
repricing via higher credit spreads, along with the anticipated increase in yields
in safe-haven countries.
Peter Onofrej
3rd quarter 2013
Oil market
Is global oil supply being presented in an overly positive light?
 Geo-political factors recently caused a mild increase in the oil price
 Rising global oil demand in Q3 results in a more positive supply and demand situation
 2013: Oil price expected to be slightly firmer in H2 2013 than in Q2 2013
USD per barrel (Brent)
125
120
115
110
105
100
95
90
Jan-11 Jul-11 Jan-12 Jul-12 Jan-13
Source: Bloomberg
Global oil demand
94
92
90
88
86
84
82
Q2 12
Q1 13
2015f
Q4 13f
Q3 11
2014f
Q4 10
Q1 10
Q2 09
Q3 08
Q4 07
Q1 07
80
2013e
Accordingly, we project that the price of oil will be higher in H2 2013 than it was
in Q2.
130
million barrels per day
Aside from the geo-political factors, fundamental data currently present a rather
mute picture. In their latest forecasts for 2013, OPEC projects an increase in
global demand from 800,000 while the US agency EIA forecasts 900,000 bpd.
At the same time, however, oil supply in the non-OPEC countries is expected to
increase between 1 million (OPEC) and 1.2 million bpd (EIA). At first glance,
these figures seem to run counter to any possible increase in the price of oil.
Nonetheless, we believe that there are already arguments relevant to Q3 which
point to a moderate increase in the price of oil to over USD 110 per barrel of
Brent. First, global supply is far more fragile than it is often made out to be.
Along with Iran, there has also recently been lower production in Libya as well,
due to unrest there. It also appears that the conflict between South Sudan and
Sudan may flare up again. And due to maintenance work, there will probably
also be a temporary reduction in North Sea production during the third quarter.
As global oil demand in Q3 tends to rise by around 1 per cent compared to
Q2 due to seasonal factors, we take a much more positive view of the supply/
demand situation.
Brent traded in a rather narrow range
Source: IEA, Raiffeisen RESEARCH
Oil price forecast - Brent
130
120
110
USD per barrel
Since mid-June, the price of a barrel of Brent has risen temporarily over USD 105
again, after trading was essentially locked for almost two months in a narrow
band of USD 100-105 per barrel. In our opinion, it was mainly geo-political
factors that drove this minor “breakout” in the oil price. For instance, there has
been a flare-up in worries about the unrest in Syria spreading to neighbouring
countries, in part due to the strongly opposing positions of Russia on the one
hand and the USA (and some European countries) on the other.
The outcome of the presidential elections in Iran was surprising (for many observers), as Hassan Rohani – the most moderate candidate from a Western point of
view – came out victorious, but this has not had any impact on oil prices so far.
Nevertheless, the significance of this vote by the Iranian electorate should not be
underestimated. Due to the sanctions, Iran is currently only able to export about
1 million barrels per day (bpd). Compared to export volumes from 18 months
ago, this represents a decline of more than 50%. Under outgoing President Ahmadinejad, the lifting of sanctions did not seem possible, whereas this can no
longer be ruled out under the new President Rohani, who is purported to have a
much better diplomatic touch. At the same time, Rohani has already stressed that
Iran does not want to give up its nuclear programme. In general, one can expect
that rapprochement with the West would lead to a reduction in the risk premium
(which is already low in our view), as the risk of military action against nuclear
facilities in Iran would decline.
100
90
80
70
60
50
2016f
2012
2011
2010
2009
2008
2007
2006
40
Hannes Loacker
Source: Thomson Reuters, Raiffeisen RESEARCH
3rd quarter 2013
21
Gold market
Gold: Little glitter in the outlook
 Weak outlook for the gold price over the short term, with more downside risks
 Opportunity costs of holding gold continue to increase
 Over the long run, demand from EM countries will be supportive
Gold price forecast
20-Jun Jun-13 Dec-13 Mar-14
USD per
troy ounce
1,297
1,380
1,320
EUR per
troy ounce
1,290
976
1,053
1,015
956
EUR/USD
1.33
1.31
1.30
1.35
*data as of 20 June 2013 11:59 p.m. CET.
Source: Bloomberg, Thomson Reuters, Raiffeisen RESEARCH
Speculative positions gold market
300
2,000
200
1,500
100
1,000
0
Jan-10 Dec-10 Dec-11 Nov-12
500
Net speculative positions*
USD gold price per troy ounce (r.h.s.)
* Net-long position Futures&Options at CME; Speculative
investors: Hedge funds and Money market investors, tsd.
Contracts; Source: Bloomberg, Thomson Reuters, Raiffeisen RESEARCH
Inflation expectations declining
2,000
3.0
1,800
2.4
1,600
1.8
1,400
1.2
1,200
Nov-10
0.6
Sep-11
Jun-12
Mar-13
USD gold price per troy ounce
Break-even inflation rate 5y inflation
protected US government bonds (r.h.s.)
Source: Bloomberg, Thomson Reuters, Raiffeisen RESEARCH
Gold ETF total holdings, worldwide
55
3,000
40
2,500
25
2,000
10
1,500
-5
1,000
-20
The immediate outlook for the gold price remains subdued. As has been frequently discussed, the rally in the price of gold has been seriously undercut by
optimism about the economic outlook, expectations of increasing real long-term
interest rates and improvement in global risk sentiment. By mid-April at the latest,
the signs for gold were highly negative as the price slipped by more than 10%
within just a few trading days. The renewed, strong declines seen in the wake
of announcements about a normalisation of the Fed’s monetary policy show just
how large these downside risks are.
Assuming a gradual recovery in the global economy, in conjunction with lower
risks to financial and currency stability, there are several factors pointing towards
further declines in the price of gold right now. In particular, the announcement of
a step-by-step reduction in the US central bank’s QE3 measures is preventing major financial investors from re-entering the gold market. Rising long-term interest
rates and USD appreciation are really not benign conditions for increases in gold
prices. An especially negative impact is also being felt from the fall in inflation
expectations and the related increase in real interest rates, as gold offers no fixed
interest remuneration. This assessment is reflected by the fact that (net) long positions of speculative financial investors have reached a multi-year low of 43,344
contracts. Holdings of gold ETFs have also seen massive losses in recent months:
in Q2, the decline amounted to around 350 tonnes, with a drop of around 530
tonnes since the beginning of the year.
Some mild upside potential may open up in the autumn, however, due to resurgent risks in the Euro area (e.g. government crisis in Greece, financing problems
in Portugal), but these will only tend to cause brief swings in prices. In 2014,
the price of gold should then begin to enjoy some support from rising demand
from the EM countries. This is underlined by the recently strong development of
demand for jewellery: according to the statistics of the World Gold Council,
demand from China, Taiwan, Hong Kong and India amounted to 51.8 tonnes in
Q1 and was thus significantly higher than the long-term average. Central banks
will also continue to diversify their currency reserves and this should generate additional demand. Nonetheless, it will take several quarters until the outflows from
the gold ETFs and the decline in speculative positions can be compensated for. In
the absence of strong inflationary pressure and with the lack of currency risks, a
new rally in the gold price is quite unlikely.
Manuel Schuster
500
-35
0
Jan-09 Feb-10 Mar-11 Apr-12 May-13
Holdings Gold ETFs, in-/outflows
(tonnes)
Holdings Gold ETFs, worldwide
(tonnes, r.h.s.)
Source: Bloomberg, Thomson Reuters, Raiffeisen RESEARCH
22
3rd quarter 2013
Special
Reduction in abundant liquidity as a burden for the summer
 Start to winding up the Federal Reserve’s “quantitative easing” policy as a temporary negative factor for the equity market
 Cut-back in liquidity can be weathered if there is also improvement in economic activity
 Japanese stock profiting from the ultra-expansive monetary policy of the Bank of Japan
In light of the extraordinarily low levels of interest rates and the numerous bond
purchase programmes in many developed economic regions, many market observers currently describe the development of the equity market as being “liquidity driven”. The topic of liquidity, however, has many dimensions and is extremely difficult to grasp as a single concept. For instance, it is often overlooked
that every buyer of a security must be matched by a seller as well. Accordingly,
from a purely fundamental point of view the most sensible question is whether
there is a larger amount of funds (e.g. stemming from quantitative easing or credit
growth) for the same amount of investment options and whether this means that
a higher price is likely. The movement of the different asset classes in relation to
each other is then more the result of changes in their assessment rather than an
expression of their fair value. The market reaction to the debate about the US
Fed’s monetary policy course going forward illustrates how sensitively investors
react to the announcement of more restrictive monetary policy. The announced
reduction in bond purchases by the Federal Reserve as the beginning of the end
of QE and the anticipated turnaround in interest rates which would be expected
in the event of a more sustainable recovery in the US economy would have
negative ramifications for the supply of liquidity on the one hand and would
consequently also result in the currently extremely cheap refinancing costs for
firms becoming more expensive. With regard to the topic of interest rate hikes
at least, all of the above pertains to the distant future due to the economic risks.
Over the summer months, however, a gradual exit from quantitative easing will
become a negative factor for the equity markets, in conjunction with the anticipated good data on the labour market (some of which has already been priced
in). This is even more so the case in light of the fact that, aside from the Bank of
Japan – which intends to double its monetary base over the next two years and
should thus provide strong support for Japanese equities in H2 2013 – no other
major central banks (ECB, BoE, SNB) are planning on major easing measures.
In historical terms, it is clear that normalisation of monetary policy does not necessarily have to put an end to an uptrend for stocks, as a historical comparison
shows mostly positive performance by the S&P 500 during the 12 months after
the first interest rate hike in the cycle. Only an overly restrictive monetary policy,
which would no longer go hand in hand with an improvement in economic activity, would finally put an end to the bull market for equities that has been going
on in the USA for more than four years now. In relation to the “liquidity context”,
interesting information can also be learned from an examination of the cash buffer and the positioning of institutional investors. While the cash holdings ratios of
the “professionals” is significant and therefore a major setback looks unlikely, as
an asset class equities (in particular US equities) are already strongly weighted
in the portfolios. This is not the case, however, for equities from the Emerging
Markets, which have not been so strongly underweighted (and featured such low
valuations) since the end of 2008! The gloomy sentiment, however, is a good
reason to take heart, because signs like these usually mean that the bottom of the
trough is soon to come. With this in mind, any further declines until the middle
of the quarter may represent a good opportunity for a long-term engagement.
Christian Hinterwallner
3rd quarter 2013
Fed influences stock market
20%
400,000
10%
200,000
0
0%
-200,000
-10%
-400,000
-20%
2011
2012
2013
S&P 500, 3 month change
Federal Reserve - monetary impulse
(r.h.s.)*
* Federal Reserve monetary base, 3 month change in 3
month change, in mn USD
Source: Thomson Reuters, Raiffeisen RESEARCH
First interest rate hike usually
unproblematic
1 month
6 months
12 months
Dec-65
0.9%
-6.0%
-12.2%
Aug-67
-1.2%
-2.6%
3.2%
Apr-71
3.6%
-2.0%
6.9%
Mar-72
0.6%
4.2%
4.8%
Mar-74
-2.3%
-25.0%
-15.2%
Feb-77
-2.2%
-3.1%
-12.5%
Aug-80
0.6%
6.5%
7.6%
Jan-82
-1.8%
-10.6%
14.8%
4.1%
Apr-83
7.5%
8.6%
Jan-87
13.2%
25.5%
2.0%
Apr-88
0.9%
5.0%
13.9%
Feb-94
-3.0%
-4.8%
-2.3%
Mar-97
-4.3%
13.7%
32.7%
Jul-99
-3.2%
7.0%
6.0%
Jul-04
-3.4%
6.2%
4.4%
Average
0.4%
1.5%
3.9%
15 Federal Reserve interest rate hike cycles since 1965
and subsequent S&P 500 performance
Source: Deutsche Bank, Raiffeisen RESEARCH
23
Stock markets – USA
Liquidity worries interrupt the robust uptrend, for now at least
 Consolidation after indices hit record highs
 Prospects of liquidity tapering may be a hindrance for now
 Upward trend only expected to resume towards year-end
Dow Jones even beats the Nikkei*
130
120
110
100
90
Dec-12
Feb-13
Apr-13
May-13
Dow Jones Industrials
Nikkei 225
Euro STOXX 50
* in EUR
Source: Thomson Reuters, Raiffeisen RESEARCH
US corporate earnings above trend
5.5
4.5
3.5
Trend earnings
2.5
1.5
69 74 78 82 86 90 94 99 03 07 11
The major US stock indices have posted strong double-digit gains since the beginning of the year. The US Fed, along with the other major central banks around
the world, is pumping virtually unlimited amounts of liquidity into the financial
markets. This supports the equity markets, together with many other asset classes.
This year, however, it is becoming increasingly clear that the bulk of these cash
flows is flowing into the equity market, rather than into other asset classes, which
mostly have less attractive valuations. For example, even as recently as May
the Dow Jones, S&P 500 and Nasdaq Composite were all jumping from one
all-time or multi-annual high to another. This was made possible by the steadily
good earnings of major US companies, more than abundant liquidity and the
increasing lack of alternative investments offering real returns in the USA as well.
However, since a number of Fed representatives have started to wonder more
and more about when the bond purchase programme should be scaled back (this
autumn), the price performance of US stocks – which had long seemed invincible
– has also been faltering. It appears almost certain that equities will go through
a period of consolidation during the summer months.
In our updated matrix of influencing factors, with regard to the USA we rate the
factor Politics at “2”, instead of the previous “3”. To a great extent, speculation
that the automatic spending cuts implemented months ago would weigh on investor sentiment did not turn out as anticipated. Consequently, it was still the right
decision to assess the factor Economy with a rating of “2” this past quarter. We
maintain this rating for the third quarter as well. In the second half of the year,
we expect to see more general improvement in business sentiment and halfway
decent growth. These expectations are supported by the trend on the US labour
market, which appears to us to be more sustainable than the volatile twitches in
the ISM manufacturing index or other leading economic indicators.
Index Earnings MSCI USA (ln)*
With regard to the Interest Rate Trend and monetary policy, we have left our assessment in the matrix of factors unchanged at “2”. Despite, or perhaps precisely
because of all the negative commentary, Fed chief Bernanke has made it quite
clear that no increases in interest rates should be anticipated until mid-2015,
even if the economy begins to pick up pace again in the meantime. By contrast,
the fact that the Fed’s asset purchases
Value matrix stock markets
will be tapered off some point later
Euro
Non-Euro
USA
Japan
this year should have already been
Politics
3
(3)
2
(2)
2
(3)
2
(2)
gradually priced in for equities. FurEconomy
2
(2)
2
(3)
2
(2)
1
(2)
thermore, in the current phase we beInterest rate trends
2
(2)
2
(2)
2
(2)
2
(2)
lieve that other asset classes will be
Earnings outlook
3
(3)
3
(2)
2
(2)
1
(2)
more strongly (negatively) impacted
Key sectors
3
(2)
3
(2)
2
(2)
2
(3)
Valuation/PER
2
(2)
3
(3)
3
(3)
3
(3)
by this development than the equity
Liquidity
3
(1)
3
(1)
3
(1)
2
(1)
markets will be. Whereas equities
Technicals
4
(3)
4
(3)
3
(3)
4
(3)
continue to enjoy support from the
Average
2.8
(2,3)
2.8
(2,3)
2.4
(2,3)
2.1
(2,3)
very robust corporate earnings, for a
Explanation: 1 (4) denotes a highly positive (negative) influence on the market. Assessment refers to a 3 to 6-month period. Previous assessment in parentheses
long time price increases for various
Source: Raiffeisen RESEARCH
* Earnings of the past twelve months (logarithmical)
Source: Thomson Reuters, Raiffeisen RESEARCH
24
3rd quarter 2013
Stock markets – USA
bonds and commodities were borne mainly or exclusively by the liquidity conditions. Until the autumn, yields on 10-year US government bonds will thus probably digest the latest increases at the current level, before probably moving even
higher. Consequently, government bonds remain extremely “expensive” and this
also continues to support the argument in favour of the relative attractiveness of
equities.
The sales and earnings performance of listed companies still looks very robust
right now. Since early 2009, analysts’ pre-reporting season forecasts (which
have often been lowered significantly over the short term) have more or less been
beaten by the corporate results, quarter after quarter. This continued to be the
case in the first quarter of this year, in particular with regard to corporate earnings. Even the earnings revisions trend, which reflects earnings expectations for
the twelve months to come, is now in positive territory again for the S&P 500.
According to latest estimates, companies in the S&P 500 are projected to earn
around just over seven per cent more in 2013 than in 2012. This is outstanding
performance, in light of a) the sub-average global economic growth, and b) the
massive margins and earnings that were already booked in 2012. We leave the
factor Earnings outlook at “2”.
While the valuation of the broad US equity market certainly does not look exaggerated, it is still noticeably higher than that of the European equity markets, as
the 2013e PER is now more than 13. Furthermore, the “relative” valuation of the
equity market continues to be very attractive compared to the expensive looking
bond market. In combination with the figures for price/book value ratios and/or
cyclically adjusted PERs (which are relevant for the longer term), we see the fair
valuation of this factor at just “3”.
Summary: The mood on the US stock markets recently became less enthusiastic,
due to the prospects of less support from abundant central bank liquidity. We
do not expect much to change in this regard over the summer and project that
share prices will move sideways on a volatile path, with downside risks early in
the quarter. Nevertheless, in light of the prospects for economic recovery and the
lack of alternative investment opportunities (offering possible real returns), we believe that the upward trend will start again during the final quarter of 2013. Until
then, however, we take a moderately negative view on this market and change
our recommendation to “Hold”.
Helge Rechberger
DJIA
0
0%
-20%
-200
-40%
-60%
2005
1600
1400
1200
1000
800
600
400
200
0
1970 1980 1990 2000 2010
100
90
80
70
60
50
40
30
20
10
0
MSCI USA
Index earnings of the respective past
12 months (r.h.s.)
Source: Thomson Reuters, Raiffeisen RESEARCH
Valuations
PER
Growth Div.
13e
14f
13e yield
Euro STOXX 50 11.2 10.0
1.4% 4.4%
DAX
11.6 10.3 -4.5% 3.4%
CAC 40
11.8 10.4 -0.7% 4.0%
AEX
FTSE
SMI
DJIA
S&P 500
Nasdaq 100
Nikkei 225
12.1
10.4
11.6%
3.2%
11.6
14.3
13.0
14.5
15.2
14.4
10.6
12.9
12.0
13.0
13.8
12.3
3.8%
7.2%
7.7%
7.7%
6.8%
53.7%
3.9%
3.4%
2.9%
2.2%
1.6%
1.9%
PER ... Price to earnings ratio; Growth ... Earnings
growth 2013e; Div. yield … Dividend yield
Source: Thomson Reuters, Raiffeisen RESEARCH
Mar-14
Jun-14
15,800
15,500
Hold
1.6%
5.0%
7.1%
5.0%
YTD 2012
3,365
2011
Index records supported by earnings
Dec-13
1,588
2009
* Balance of the number of positive and negative earnings revisions for the upcoming 12 months (r.h. scale)
Source: Thomson Reuters, Raiffeisen RESEARCH
15,500
14,000-15,300 14,400-15,700 14,800-16,000 14,800-16,000
-400
2007
Dynamics of earnings revisions (r.h.s.)*
S&P 500 (12M change in % yoy)
Sep-13
Range
Range
200
20%
15,000
Performance
Performance
400
40%
14,758
Range
Nasdaq Comp.
60%
20-Jun 1
Performance
S&P 500
Earnings revisions move upwards
Recommendation* Favourite sectors
12.6%
Energy
Industry
IT
1,610
1,680
1,710
1,680
Hold
Energy
1.4%
5.8%
7.7%
5.8%
YTD 2012
Industry
1,485-1,650
1,520-1,670
1,580-1,730
1,580-1,750
11.4%
3,400
3,600
3,700
3,600
Hold
1.1%
7.0%
10.0%
7.0%
YTD 2012
3,200-3,550
3,350-3,800
3,450-3,900
3,500-3,900
11.4%
IT
Hardware
Semiconductors
1
11:59 p.m. CET closing price on the respective main stock exchange
* Horizon: End of 3rduarter 2013
Source: Thomson Reuters, Raiffeisen RESEARCH
3rd quarter 2013
25
Stock markets – Euro area
Worries about a less active US central bank
 Worries about less central bank liquidity weigh on sentiment
 Valuations still moderate
 Economy expected to generate some support
Valuation Euro area
30
20%
25
10%
20
0%
15
-10%
10
-20%
5
-30%
0
-40%
96 98 00 02 04 06 08 10 12
PER*
Valuation gap (r.h. scale)**
* 12 months forward price to earnings ratio
** valuation discount MSCI EMU vs. S&P 500
Source: Thomson Reuters, Raiffeisen RESEARCH
Support from economy expected
60%
60
40%
55
20%
50
0%
45
-20%
40
-40%
35
-60%
2008 2009 2010 2011 2012 2013
30
MSCI EMU (% yoy)
Eurozone PMI (r.h. scale)
Source: Thomson Reuters, Raiffeisen RESEARCH
Negative earnings revisions continue
100%
250
50%
125
0
0%
-125
-50%
-100%
2005 2007 2009 2011
-250
All in all, the performance of the equity markets in the Euro area was mostly
positive during the period under review. While the Euro STOXX 50 was able
to reach a new high for the year, the DAX actually managed to advance to an
all-time high. Nonetheless, the indices were unable to hold onto these levels,
especially since worries about the start of liquidity withdrawal by the US central
bank began to crop up in May. Statements by the Fed in particular contributed to
a much more cautious mood.
Against this background, the mostly positive economic data in the Euro area
played a somewhat less important role. Although the data still do not point to any
vigorous upturn, we believe that in the second half of the year the situation will at
least improve, which should be reflected in rising leading indicators. At the same
time, significant risks to economic activity remain.
The latest reporting season also underlined the fact that economic conditions in
general are subdued. For instance, sales figures in particular fell short of expectations. Furthermore, the trend in earnings was also weaker than it was in the
previous quarters. Companies’ guidances were cautious, as usual. In general, a
negative view is still taken on profits. This is well reflected by the earnings revisions for the Euro area, which have been on a downtrend for quite some time
now. In this regard, we stick with our opinion that the biggest adjustments in the
estimates have already occurred.
In our opinion, the issue of valuations will probably come more into focus over
the longer term. In the meantime, the valuations for the Euro area equity markets
can no longer unequivocally be described as attractive. However, this has less
to do with the earnings revisions and more to do with the positive trend on the
market. Compared to the government bond segment, equities continue to be
relatively more attractive.
Despite all of these factors, in our view, the main driver for the performance of
the Euro area equity markets will be the discussions about reducing the Fed’s
bond purchase programme. We expect that the equity markets will be prepared
verbally for moves of this kind over the coming months. It should be clear that this
will not necessarily be welcome news for investors, as a great deal of the rally
on the stock markets was due to the generous supply of liquidity. Accordingly, it
seems very likely that market participants will take a reserved approach in the
summer months, which should ultimately result in a flat trend line. At the same
time, it should also be clear that a less expansive monetary policy does not mean
that the central bank will be completely shutting off the flow of liquidity, and the
liquidity conditions should remain adequate. This is another reason, why we see
only a small change of a sharp correction, especially since the economic data
should also gradually begin to provide some support as well. Hold.
Johannes Mattner
Dynamics of earnings revisions (r.h.s.)*
MSCI EMU (12M change in % yoy)
*Balance of the number of positive and negative earnings revisions for the upcoming 12 months
Source: Thomson Reuters, Raiffeisen RESEARCH
26
3rd quarter 2013
Stock markets – Non-Euro
Path determined by central bank policy right now
 Great Britain: GB companies are not very optimistic
 Switzerland: profiting from strong domestic activity
 Weaker equity market performance in Q3, followed by more gains
Euro STOXX 50
0
-5
Jan-13
Feb-13
Apr-13
Materials
Development of aggregated earnings estimates 2013
Source: Thomson Reuters, Raiffeisen RESEARCH
Sector performance Q1 2013*
Health care
Technology
Consumer goods
Industrials
Consumer serv.
Telecommunications
STOXX Europe 600
Financials
Oil & gas
Utilities
Basic materials
-3%
* Stoxx Europe 600 since 31/03/2013
Source: Thomson Reuters, Raiffeisen RESEARCH
Mar-14
Jun-14
2,850
2,900
2,800
Hold
Energy
0.5%
10.2%
12.1%
8.3%
YTD 2012
Industry
2,250-2,750
2,350-3,000
2,450-3,100
2,500-3,100
-1.9%
8000
8500
8700
8600
Hold
Energy
0.9%
7.2%
9.7%
8.5%
YTD 2012
Industry
7,300-8,300
75,00-8,700
7,900-8,900
7,800-8,800
4.2%
6,250
6,600
6,700
6,600
Hold
1.5%
7.2%
8.8%
7.2%
YTD 2012
5,700-6,500
5,900-6,700
6,000-6,800
6,000-6,800
4.4%
7,600
8,000
8,150
8,050
Hold
1.4%
6.7%
8.7%
7.4%
YTD 2012
7,000-7,900
7,400-8,300
7,700-8,500
7,600-8,400
9.9%
7,928
6,160
Range
7,496
May-13
FTSE 100
Dec-13
Performance
Range
5
2,600
Range
Performance
10
Sep-13
Performance
SMI
15
2,586
Range
FTSE 100
20
20-Jun 1
Performance
DAX 30
Materials weigh on earnings
in %
The performance of the non-Euro area stock markets was hampered by the uncertainty resulting from the looming reduction of bond purchases by the US Fed.
During the first quarter, some rays of hope for economic performance began to
appear in the United Kingdom (GDP growth: +0.3% qoq). If this rise in growth
proves to be more than just a brief uptick (and we think it will), the most likely
scenario is for the Bank of England to take a wait-and-see approach in its bond
purchases. The focus should remain, however, on the FLS (Funding for Lending Scheme). Corporate surveys are less optimistic. GB companies are strongly
dependent on foreign trading partners, and an export-driven recovery does not
appear imminent right now. This is also reflected in the 2013 earnings estimates
for the FTSE 100. Since our last publication, these estimates have fallen by almost
50%. The main reason for this was downward earnings revisions in the materials
sector. This reflects the weak currencies and slack demand in the final consumer
markets and the prolonged recession in the Euro area. Nevertheless, we believe
that most of the adjustment has now been completed and that this factor will thus
have a limited impact on the stock market going forward.
Since hitting a high for the year in May, the Swiss equity market (SMI) has also
lost a great deal of ground and been marked by high volatility. We do not see
any major threats to the stock market emanating from the Swiss economy, even
though the current economic performance does not enjoy broad-based support
there and is only profiting from robust domestic activity. Downward revisions in
earnings estimates for the strongly export-oriented sectors are still being offset
by the higher earnings prospects in the financial and healthcare sectors. Consequently, the earnings growth expectations for 2013 are unchanged at +7%.
Due to the strong setback, valuations have become more attractive again, but
they do not really look very cheap. Nevertheless, alternatives are hard to come
by. Nervousness in the form of elevated volatility will probably remain in the
markets, and thus we project only moderate index level changes over a 3-month
horizon. Beyond this, however, we forecast the index to move higher because a
slightly less expansive monetary policy by the US Fed is not necessarily negative
for the equity market, and we also expect to see improving economic conditions.
Christine Nowak
Recommendation* Favourite sectors
Energy
IT
Industry
Consumer discr.
1
11:59 p.m. CET closing prices on the respective main stock exchange
* Horizon: End of 3rdquarter 2013
Source: Thomson Reuters, Raiffeisen RESEARCH
3rd quarter 2013
27
Special – Japan
Quo vadis, Nippon?
 Abenomics is starting to make a mark
 Uncertainty about economic policy going forward and doubts about its success
 Financial market volatility increases
Few topics have been so prevalent in the media as Japan since the change of
government. The Land of the Rising Sun has attracted great interest with its massive expansion of financial policy to fight the “final” battle against deflation.
As a result, the value of the yen slumped and the Japanese stock market posted
gains the likes of which have not been seen there for ages. Since then, however,
the sobering reality has set in. Several topics are currently being discussed on
the market:
More optimism
70
50
30
10
May-03
May-06 May-09 May-12
Japan Manufacturing PMI
Japan PMI Input Prices Index
Japan PMI New Export Orders Index
Japan PMI New Orders Index
Source: Thomson Reuters, Raiffeisen RESEARCH
BoJ & Fed balance sheets & JPY/USD
70
80
30
JP expansion of money supply
25
20
100
15
110
10
120
JPY depreciates
130
Forecast
90
5
0
140
-5
Jan-00 Jul-03 Jan-07 Jul-10 Jan-14
JPY/USD (inverted)
Monetary base ratio (US/JP, r.h.s.)
Source: Thomson Reuters, Raiffeisen RESEARCH
Bonds: more capital inflows again
15,000
10,000
5,000
0
-5,000
-10,000
-15,000
Jun-10
Nov-11
Apr-13
Net-bond purchases (sales)
moving 4-week-average, in hundreds of millions JPY
+ capital inflow, - capital outflow
Source: Japanese Ministry of Finances, Raiffeisen RESEARCH
28
First: Since Kuroda took over as the new governor of the central bank, the monetary programme has been expanded massively (doubling the money supply,
inflation goal of 2%, ...). Right now, central bankers are reluctant to make any
more statements. In particular, the fact that the increase in yields on the longer
end of the maturity curve (and thus rising interest rates in the mortgage lending segment) did not trigger any massive countermeasures has resulted in some
doubts about the central bank’s policy (the average for 10-year bond yields over
the last 10 years is 1.4%, which puts the roughly 50bp rise in yields to the current
level of 0.8% in a completely different light!).
Second: The economic policy programme also resulted in some disappointment.
So far, however, the economic data have nourished hopes. Annualised growth in
Q1 2013 already came in at 3.5%, supported by a wide range of components.
With the exception of investment, both domestic demand and export demand
(thanks to the weaker yen) contributed to stabilisation. Confidence and sentiment
indicators are reflecting the first fruits of the turnaround in Japanese economic
policy. Corporate expectations have probably stabilised enough so that companies are now planning on boosting their investment spending again for the first
time. As the year progresses, the government’s economic policy should pick up
momentum and ensure another burst of growth. An increase in business confidence would make some desperately needed reforms easier. Publication of the
second part of the growth strategy is expected to occur in the autumn.
Third: Sustained, positive, nominal growth is necessary in order to get control of
the massive public debt amounting to around 240% of GDP. In this regard, the
development of yields (refinancing costs) is critical, and this closes the circle. The
latest increase in yields is not so much an expression of higher inflation expectations (which could certainly be interpreted in a positive light), as an expression
of increased worries about the extent to which Japan has its debt problem under
control. We do not assume that this increase in yields will continue at this pace.
On the one hand, the central bank has the option to influence yields, due to the
volume of purchases (absorbing about 70% of newly issued bonds). On the other
hand, outflows of capital from Japan have recently turned around again, according to the latest statistics. As we do not expect a massive sell-off of Japanese
bonds, these discussions should calm down again.
3rd quarter 2013
Stock market – Japan
Arrows pointing higher again
 Optimists gain the upper hand again, after a sharp correction
 Strong earnings growth thanks to weakening yen trend
 Prices driven by economic improvement and liquidity
The performance of the Nikkei 225 in the past quarter verged on the manic-depressive. The announcements by incoming central bank governor Kuroda (which
included doubling the monetary base by purchases of securities by the end of
2014) initially led to unbridled, irrational enthusiasm, prompting share prices to
rise by more than 80% on the whole in the period between the announcement of
new elections and mid-May. Following this, mixed communications by the central
bank about the possible consequences of such measures and disappointed hopes
for even more liquidity triggered a crash-like downturn with declines of more
than 20% at times. Looking ahead to the rest of the year, one key aspect will be
the impact from the economic reforms, which have been christened “Abenomics”, after the Prime Minister, Shinzo Abe. The goal is to use a mix of various
measures – which the government refers to using the metaphor of three arrows
– to lead Japan’s economy out of its decades-long lethargy of repeated recession
and price deflation. The first arrow stands for the infrastructure investment package announced at the beginning of the year. Arrow two is the ultra-expansive
monetary policy with the goal of reaching 2% inflation within the next two years.
Weakening the external value of the yen plays a key role in this regard, but welcome side-effects also include an increase in asset prices (equities, real estate)
in order to stimulate consumption and lending, as well as prepare the ground
for inflation expectations. The approach is rounded off by the planned structural
reforms, which are intended to significantly boost the potential growth of the
Japanese economy. In our opinion, these measures will provide ample stimulus
for the foreseeable future and ensure relatively strong GDP growth of 2.2% this
year and 2.3% in 2014. It is also clear, however, that these arrows may miss
their long-term target due to self-imposed obstacles (planned doubling of VAT in
2014/15) and structural obstacles (labour force shrinkage of up to 1% annually
in the coming decades). Furthermore, investors must also keep in mind that these
arrows could also quickly end up going in the wrong direction, when viewed in
the context of the high level of public debt in Japan. Over the short run, however,
this is not expected to be the case. Accordingly, for now there should be good
support for the stock market in Tokyo from economic policy. In this environment,
the yen should also continue to depreciate. It is precisely this lower external
value of the Japanese currency, which will lead to an improvement in corporate
competitiveness for Japan. For instance, a move of one unit in the JPY/USD
exchange rate results in additional profits of JPY 35 bn (EUR 270 mn) for Toyota
Motor alone. At the index level, this had led to mostly positive earnings revisions
by analysts. The estimated earnings growth of around 50% for the coming business year thus appear quite realistic to us. In terms of valuation, the market is no
longer looking so cheap due to the increases in share prices, but at the same time
the valuation of the Nikkei 225 is not excessively high. Following the healthy correction seen in recent weeks, further recovery in economic activity in combination
with yen depreciation, stronger increases in earnings and last but not least the
extremely expansive monetary policy should ensure that the arrows point higher
again for Japanese stocks in Q3.
Christian Hinterwallner
3rd quarter 2013
Taking breath for another rally
200
135
180
128
160
121
140
114
120
107
100
Jan 00
100
Jan 13
Nikkei 225
Mar 13
May 13
JPY/USD (r.h.s)
* rebased to 100
Source: Bloomberg, Raiffeisen RESEARCH
Land of the rising earnings
60%
160
30%
80
0%
0
-30%
-80
-60%
2010
-160
2011
2012
Dynamics of earnings revisions (r.h.s.)*
MSCI Japan (12M change in % yoy)
* Balance of the number of positive and negative earnings revisions for the upcoming 12 months
Source:Thomson Reuters, Raiffeisen RESEARCH
Nikkei 225
Recommendation:
20-Jun1
Favourite sectors
Buy
13,015
Utilities
Consumer discretionary
Forecasts
Sep-13
Dec-13
Mar-14
Jun-14
14,000
14,800
15,000
14,100
7.6%
13.7%
15.3%
8.3%
Ranges
Sep-13
Dec-13
Mar-14
Jun-14
12,00015,000
12,80016,000
14,00016,500
13,30016,000
11:59 p.m. CET closing prices on the Tokyo
Stock Exchange
Source: Raiffeisen RESEARCH
1
29
Global industry groups
Selective approach for the summer months
 Rotation into cyclical stocks continues
 Energy sector discounting a bottom in oil prices; utilities poised for a countermove
 Some weak fundamental data in the materials sector
Sector development in Q2 2013*
Cons.discr.
IT
Financials
Health care
Industrials
MSCI World
Telecoms
Energy
Utilities
Cons.staples
Materials
-7%
-4%
-1%
2%
5%
*MSCI sectors in local currency since 31-Mar 2013
Source: Thomson Reuters, Raiffeisen RESEARCH
MSCI World Energy
135
130
125
120
115
110
105
100
95
Jun-12
Sep-12 Dec-12 Mar-13 Jun-13
MSCI WORLD ENERGY
MSCI WORLD INDEX
Source: Thomson Reuters, Raiffeisen RESEARCH
MSCI World Cons. discretionary
150
145
140
135
130
125
120
115
110
105
100
95
Jun-12
Sep-12 Dec-12 Mar-13 Jun-13
MSCI WORLD CONSUMER
DISCRETIONARY
MSCI WORLD INDEX
Since early May, energy sector shares have performed better than the market as
a whole, after having lost around five percent in relative terms during the first four
months of the year. This “trend reversal” was mainly due to the oil price, which
turned out to be significantly more resilient than the prices of most other commodities. As global oil demand tends to increase by around one percent from Q2 to
Q3 due to seasonal factors, we expect to see support for this sector from the oil
price in the months ahead. Overweight.
Sentiment in the industrials sector improved somewhat recently. It is now quite
clear that companies are looking forward to better developments in the second
half of the year (in part due to the weak basis for comparison from the previous
year). Furthermore, many companies are engaged in restructuring programmes
to lower their cost base. Optimism about a revival in demand in the investment
goods industry is currently focused mainly in the US, as there are high hopes in
relation to the “re-industrialisation” of the country. The industrials sector in the US
also profits especially from the low gas prices, which bolster its competitiveness
at the international level. Overweight.
Following a rather subdued reporting season, technology sector shares managed to bounce back, as investor sentiment improved substantially in the past
quarter. In their guidances released following the quarterly data, many companies mentioned a sharp recovery in H2 and this appears to be quite realistic;
visibility also improved for many companies in April/May. We would explicitly
point out the protracted weakness of the PC sector, which looks to be even more
severe based on the current forecasts by IDC. In light of this, companies with
significant exposure in the PC market should be avoided. The valuation levels in
the IT sector are currently extremely attractive. Overweight.
Since the beginning of the year, consumer discretionary has been one of the
leading sectors. Based on the consensus estimates for this year, aggregate earnings growth is expected to reach 18%. This means that, despite the varying
growth rates in the global economy, the companies will be able to substantially
increase their record-high profits, even though they are already registering very
strong earnings. This trend appears quite plausible, as the major driving factors
(extremely cheap refinancing conditions, minimal wage pressure) will continue to
have a beneficial effect in the current earnings cycle. At the same time, however,
it must be noted that several segments of this sector (such as cyclical retail, consumer services) already look slightly overvalued. With regards to the next move,
we continue to expect above-average performance for this sector, thanks to the
above prospects and other positive factors (e.g. falling prices for steel, rubber
and cotton). Overweight.
With regard to the utilities sector, we have mixed feelings at the global level,
but on the whole the positive factors should prevail in the period ahead. Whilst
Europe continues to suffer from the slim margins in the production business and
regulatory issues, US utilities are profiting from the use of relatively cheap shale
gas in electricity production (which allows for higher capacity utilisation at power
plants) and the rising demand for energy in conjunction with re-industrialisation.
Source: Thomson Reuters, Raiffeisen RESEARCH
30
3rd quarter 2013
Global industry groups
Heavyweight Japanese utilities should also profit disproportionately from the recommissioning of their nuclear power plants. Overweight.
Recent developments in the materials sector have also been disappointing. The
sector suffered strongly from the tough fundamental situation in the steel business,
some oversupply issues in industrial metals and the poor economic data from
China. As the situation does not seem to be improving right now, we underweight
this sector. Underweight.
Following the rise in prices in the last 12 months, the financial sector no longer
looks so cheap, as one should not blindly assume that the driving factors behind
the good performance in recent months (e.g. release of provisions, cost reduction) will remain in place. Additionally, competitive pressure is rising in the banking market, as many banks have now done most of their homework. However,
we see a risk that the financial sector may once again be beset by the negative
factors which have not been so dominant in the recent past (e.g. tighter regulation on the whole, natural disasters and pressure on premiums for insurers).
Underweight.
Corporate results in the telecommunications sector can only be described as
mixed. Due to the high penetration rate, we expect competition to remain intense,
and sales developments should stagnate as a result. In order to compensate for
the bleak growth outlook, companies keep trying to lower costs more and more.
The M&A merry-go-round is also spinning in the USA (AT&T, Verizon Wireless
etc.) and in Europe (speculation about KPN, Vodafone, Telefonica, various cable
operators, etc.). Another key topic is also new investments (e.g. in the expansion
of the LTE network). Underweight.
Following the relatively poor Q1 reporting season, the healthcare sector was
able to bounce back again. Sales were broadly lower than analysts had expected, with this development mainly driven by currency movements, along with
weaker sales of products. The situation in profits was better, as expectations were
mostly beaten in this regard. The major “patent cliff” was survived and the fundamental data look good. Research productivity has picked up pace again and the
saving measures, in Europe in particular, have slowed down. At the same time,
it should be noted that the sector has also performed very well in recent months.
We see little room for further outperformance, and thus expect developments in
this sector to fall short of the average. Underweight.
If the disappointing course of volume growth continues in the second quarter,
some companies in the consumer staples sector will have to wonder, if they
can still achieve that their organic growth targets for the 2013 business year.
For companies, which are strongly involved in the Emerging Markets, currency
depreciation will also weigh on the development of earnings. Furthermore, due
to the strong competition, the price component is also losing more and more
support. Consequently, we would not rule out further downward revisions of
earnings. The savings from lower raw material costs are frequently being spent
on marketing efforts to defend market share, and thus we do not believe that any
improvement in margins is possible. Accordingly, we expect this sector to post
sub-average performance. Underweight.
MSCI World Utilities
135
130
125
120
115
110
105
100
95
Jun-12
Sep-12 Dec-12 Mar-13 Jun-13
MSCI WORLD UTILITIES
MSCI WORLD INDEX
Source: Thomson Reuters, Raiffeisen RESEARCH
MSCI World Financials
155
150
145
140
135
130
125
120
115
110
105
100
Jun-12
Sep-12 Dec-12 Mar-13
Jun-13
MSCI WORLD FINANCIALS
MSCI WORLD INDEX
Source: Thomson Reuters, Raiffeisen RESEARCH
MSCI World Cons. staples
135
130
125
120
115
110
105
100
95
Jun-12
Sep-12 Dec-12 Mar-13 Jun-13
MSCI WORLD CONSUMER STAPLES
MSCI WORLD INDEX
Source: Thomson Reuters, Raiffeisen RESEARCH
Christian Hinterwallner, Christine Nowak
3rd quarter 2013
31
China
China: More optimistic outlook for H2
 Economy remains subdued, no stabilisation yet
 Pressure on Chinese stock markets, recovery for H2
 Appreciation of CNY held up for now, but there is still more potential
Austerity call dampens consumption
30
20
10
0
-10
Feb-11 Aug-11 Feb-12 Aug-12 Feb-13
Retail sales*
Retail sales*, catering
*Consumer goods, large enterprises
Source: CEIC, Raiffeisen RESEARCH
Bottoming out?
30
100
28
50
26
0
24
22
Mar-12
-50
May-13
Oct-12
Total private investment (% yoy)
Private investment, construction (% yoy,
r.h.s.)
Source: Thomson Reuters, Raiffeisen RESEARCH
Appreciation on hold for now
6.45
6.35
6.25
6.15
6.05
Jul-11
Mar-12
Oct-12
May-13
CNY base rate
Upper band
Lower band
CNY/USD
Source: Thomson Reuters, Raiffeisen RESEARCH
Forecasts
2011
2012
2013e
2014f
GDP % (yoy)
9.3
7.8
8.0
8.5
CPI % (yoy)
5.4
2.7
3.0
3.3
20-Jun1 Sep-13 Mar-14 Jun-14
USD/CNY
6.13
6.08
6.00
6.00
Key rate
6.00
6.00
6.25
6.50
HSCE
9,265
9,600 11,100 10,800
1
11:59 p.m. CET closing prices on the respective main
stock exchange
Source: Thomson Reuters, Raiffeisen RESEARCH
32
Economic performance in China remained subdued in the second quarter as
well. Bird flu worries and the government’s savings campaign are weighing on
consumption and thus on light industry. The deceleration in economic growth
since the beginning of the year, however, was also driven by another slump in
demand from the developed markets and a stronger-than-expected decline in
private investment growth. Consequently, no recovery is expected to be seen in
the Q2 GDP growth figures. During the third quarter, however, economic activity
should begin to stabilise, followed by acceleration.
This scenario is supported by the following factors:
 Strong credit growth in H1 (Total Social Financing: +57% yoy)
 A continuous, although slow recovery in retail sales, supported by the fading
impact of bird flu worries
 Private investments expected to bottom out, as the decline in private investments in the construction industry eases
 An anticipated rebound in external demand, in particular starting from the
fourth quarter
Due to the sluggish economic performance, the Chinese equity markets were
hit by intense selling pressure. Moreover, the current shortage of liquidity on the
Chinese financial market is also a negative factor, due to the huge outflows of
foreign capital in reaction to discussions about winding up the US Fed’s bond
purchase programme. All in all, the HSCE Index has lost around 25% since its
last high in early February. Over the short run, more losses are possible. With the
first significant signs of an economic recovery, however, the quite attractive looking HSCE Index (PER of 7.6 with anticipated 2013 earnings growth of 13.7%)
should bounce back again.
In terms of inflation, there are no cause for concerns. Consumer price inflation is
currently at +2.1% yoy, meaning that a possible interest rate hike is a subject for
the distant future, even though inflation will rise over the year with the economic
acceleration and due to base effects. Due to the current liquidity shortage, commercial banks are actually calling for the minimum reserve requirements to be
lowered. In our opinion, however, the PBoC will not take any more steps towards
monetary easing.
During the recent past, CNY has moved sideways against USD, due to the outflows of foreign capital. Additionally, a new regulation that banks must hold
larger positions in foreign currencies to hedge FX loans also lowered the appreciation pressure on CNY. In contrast to the broadly held opinion, however,
we do not expect to see an end to appreciation this year. The PBoC has credibly
stated that it is not working consciously to weaken CNY. Furthermore, the trade
balance with the USA remains strongly positive. Nonetheless, the sideways trend
may continue, with short-term risks weighted to the downside.
Judith Galter
3rd quarter 2013
India
India: Patience is needed
 Economic activity is surprisingly weak, with rebound only expected in Q4
 Following a cut, interest rates to remain unchanged until year-end
 Equity market remains attractive, the rupee is volatile and the C/A deficit at a record high
59
55
51
47
43
Mar 08
Nov 09
Jul 11
Mar 13
PMI manufacturing (s.a.)
PMI services (s.a.)
PMI composite (s.a.)
Source: Thomson Reuters, Raiffeisen RESEARCH
Trade balance dampens INR
0
38
-5,000
43
-10,000
48
-15,000
53
-20,000
58
May 13
Sep 11
Jan 10
-25,000
May 08
Consequently, the central bank faces a dilemma: weak economic activity and
the low wholesale price inflation would suggest interest rate cuts, whereas high
consumer prices and the weak currency point in the other direction. The latest
depreciation of the currency, in conjunction with the high current account deficit,
is a particular problem for the monetary authorities: if the central bank moves to
lower the key rate further (after 75bp of cuts to 7.25% since the beginning of the
year) it risks triggering portfolio outflows and more depreciation, leading to more
upside risks for inflation. At the same time, strong investment inflows – mostly in
the form of portfolio inflows – are necessary to finance the high current account
deficit (2102: roughly 5% of GDP). In recent years, the massive expansion of G-7
central bank money ensured hefty inflows of capital into the Indian economy, but
now normalisation of the US central bank’s liquidity policy is making this aspect
even more critical. Consequently, we do not expect to see any further rate cuts until the end of the year, but we do move to revise our current forecast accordingly.
63
Sep 06
Low global commodity prices and the lack of economic growth dynamics resulted
in a sharp fall in the wholesale price index, which marked a new low in May
at a rate of 4.7% yoy. At the same time, this will probably be the end of the decline for now, as no further reduction is expected due to the extremely weak INR
exchange rate and increases in administered prices. Consumer price inflation
declined for the third month in a row in May, falling to 9.3% yoy, but is still at a
high level on the whole.
PMIs still weak
Jan 05
The recovery in the Indian economy continues to move ahead at a slow pace.
Although modest acceleration was registered last quarter as the growth rate hit
4.8% yoy, the annual growth of 5.0% yoy during the last fiscal year marked a
10-year low. These developments have been driven by the lack of expansion
in domestic consumption demand and investments, and the song will probably
remain the same until Q4 2013. The difficult situation on the export markets will
also only ease gradually, and thus the upswing this year will be modest.
Trade balance (USD mn)
USD/INR (r.h.s.)
Source: Thomson Reuters, Raiffeisen RESEARCH
Rising long-term rates?
9.50
8.00
6.50
The dependence on external capital flows is also being seen on the stock market (Sensex), as significant outflows of capital have been registered in recent
weeks, due to the sluggish economy in combination with expectations about a
quick normalisation of the ultra-expansive US supply of central bank liquidity.
This process will likely continue on into the autumn, resulting in high volatility and
selling pressure. The PER of 14.9 is low for Indian standards, and the earnings
growth expectations of 10.5% for 2013 and 14.1% for 2014 suggest a potential
increase of around 10-14% in prices on the equity market by Q1 2014.
5.00
Jan 07 Aug 08 Mar 10 Oct 11 May 13
Yield 10Y Government bonds (% yoy)
Source: Thomson Reuters, Raiffeisen RESEARCH
Forecast
2011
2012
2013e 2014f
GDP % (yoy)
6.5
5.0
5.9
6.5
WPI % (yoy)
8.3
7.3
6.5
6.1
Manuel Schuster
20-Jun1 Sep-13 Dec-13 Jun-14
USD/INR
59.75 58.00 57.00 56.00
EUR/INR
78.72 78.30 72.96 71.68
India Repo rate
Sensex
7.25
7.25
7.25
7.25
18,719 18,30020,300 20,900
11:59 p.m. CET closing prices on the respective main
stock exchange
Source: Thomson Reuters, Raiffeisen RESEARCH
1
3rd quarter 2013
33
Brazil
Brazil: Powerful rise, followed by a painful fall
 Economic recovery remains moderate
 Intense pressures on the stock market
 BRL remains volatile
Investment recovers slightly
30.0
24.0
18.0
12.0
6.0
0.0
Q1 13
Q3 12
Q1 12
Q3 11
Q1 11
Q3 10
Q1 10
-6.0
GDP (real, 5 yoy)
Investments (real, % yoy)
Private consumption (real, % yoy)
Source: Thomson Reuters, Raiffeisen RESEARCH
Real under pressure
2.5
2.3
2.1
1.9
1.7
1.5
Jan-09 Dec-09 Dec-10 Dec-11 Dec-12
USD/BRL
Quelle: Thomson Reuters, Raiffeisen RESEARCH
Stock market suffers with commodities
82000
4500
72000
3900
62000
3300
52000
2700
42000
2100
32000
Jan-09 Feb-10 Apr-11 Jun-12
1500
BOVESPA
LME metal price index (r.h.s.)
Source: Thomson Reuters, IBES, Raiffeisen RESEARCH
Forecasts
2011
2012e
2013f
2014f
GDP % (yoy)
4.8
0.9
2.4
CPI (yoy)
4.9
5.4
6.1
3.8
5.2
20-Jun1 Sep-13 Dec-13
Jun-14
USD/BRL
2.26
2.18
2.10
2.05
EUR/BRL
2.98
2.94
2.69
2.62
Selic
8.00
8.50
8.75
8.75
Bovespa
48,214 46,500 49,000 50,500
1
11:59 p.m. CET closing prices on the respective main
stock exchange
Source: Thomson Reuters, Raiffeisen RESEARCH
34
Brazil’s economic upswing is currently turning out to be slower than we had anticipated at the beginning of the year. Although the year-on-year increase in GDP
was slightly stronger in Q1 than in Q4 2012, the quarterly rate of 0.55% was
marginally weaker than the 0.64% registered in Q4 2012. The rise in GDP was
borne by a robust rebound in investment, whereas consumption growth (public
and private) weakened. The weak growth also stemmed from the slump in exports. Nevertheless, it looks like Brazil is through the worst of it now in economic
terms. For the first time in a long while, industrial production in April was able to
beat the expectations, with an increase 8.4% yoy and 1.8% mom. This powerful
gain was driven by a 24.4% jump in the production of capital goods compared
to the previous year, which comes as a good sign for investment growth. Gains
were seen in the rest of the components as well. But before one breaks out the
champagne, it should be noted that April 2013 had more working days than
April 2012, which had a decidedly positive impact on production. In light of the
weaker Q1 performance and the decline in consumption growth, we revise our
2013 GDP forecast down from 2.7% to 2.4%.
Despite the sluggish economic activity, the Brazilian central bank made a unanimous decision to raise rates more than expected. The market and our analysts
had been looking for an increase of 25bp to 7.75%, but the central bank lifted
rates by 50bp to 8.0%. While this is a good sign that the central bank is sticking
to its policy line since March/April, the question is whether higher interest rates
are the correct response to the lacklustre economic conditions. Another factor is
that investments had just started to recover and excessively high interest rates
could jeopardise this revival. For this year, we expect to see a total of 75bp in
further rate hikes, and from year-end the key rate should remain stable at 8.75%.
The Brazilian stock market came under intense pressure in recent weeks. All in
all, the equity market lost 13.8% in the period between 21 March and 20 June
2013. These losses were driven by worries about the Fed winding up its liquidity
measures and uncertainty about the Chinese economy. Fundamentally speaking,
the anticipated profits for the Brazilian stock market for the next 12 months are
relatively positive at 18%, which is also reflected in the relatively cheap PER of
9.8. At the moment, however, valuations are not playing a leading role and
consequently we project a negative performance during the first half of the third
quarter. The BOVESPA will probably also turn around if there are signs of a
significant upturn in the Chinese economy, leading to a rebound in commodity
prices. On the whole, however, Q3 will probably feature a decline of around
3%.
Just like the stock market, the Brazilian real was also undercut by the turbulence,
with the currency depreciating by around 6% to the US dollar and hitting a rate
of 2.22. We see this as a case of clear overshooting and expect that USD/BRL
will stabilise at 2.18 during the quarter.
Nina Kukic
3rd quarter 2013
Technical analysis
Fixed income markets: Significant losses ahead
EUR/USD
EUR/USD
Last: 1.3218
The recently expected recovery to 1.3100 had been topped by the following buy-signal at 1.3200 -> 1.3405,
but the current correction that hit in since might find support at the Fibonacci-Retracement 1.3060, while downward- potential stretches to even 1.2900, the rising-support line. A first bullish signal would be the crossing of
1.3250 as this could result in a prolongation beyond
1.3420.
Short -> 1.3060 – 1.2900
Stop 1.3250 -> 1.3300 – 1.3420
Data as of 20.06.2013, 07:30 p.m. CET
Source: Thomson Reuters, Raiffeisen RESEARCH
US T-Note Future
US T-Note Future
Last: 127-03
With this rolling-gap of more than 2 points the recently
named rising-support-line (RSL) at 125-22 has been
crossed to the downside giving way to a further decline
to 123-12 if not 118-00. Now the gap might get closed
with a move upwards to 129-00, but the bearish rating
only changed to neutral again once in beyond of 13000 again.
short
-> 132-13 – 118-00
Stop
127-20 -> 128-25 – 129-00
Data as of 20.06.2013, 20:15 MEZ
Source: Thomson Reuters, Raiffeisen RESEARCH
EURO Bund Future
EURO Bund Future
Last: 142.13
The Rectangle’s range 139.40 – 147.00 will soon be
put to the test at its support-line. A conservative signal
to sell would be triggered at 138.40 with 133.00 becoming the respective target. In case 138.40 held firm
on first trial a recovery towards 144 should set in, else
a further decline towards 133 - and even 130 - would
get indicated.
Sell 138.00 -> 133.00 – 130.00
Stop 144.00
Data as of 20.06.2013, 07:05 p.m. CET
Robert Schittler
3rd quarter 2013
Source: Thomson Reuters, Raiffeisen RESEARCH
35
Technical analysis
Correction or topping pattern?
Dow Jones Industrial Future
Dow Jones Industrials Future
Position: NEUTRAL
All long-term supports are still sound, hence an increase
towards 16,500 – 17,000 cannot be ruled out. Though,
there are some indications that favor the scenario of a
strong correction: the divergence to the MACD oscillator
and the Double-Top of the RSI within its overbought territory. Therefore, the decrease is expected to continue, sell
14,400 -> 13,820 –12,540. The low of this move would
be established in the middle of July.
Data as of 21.06.2013, 01:21 p.m. CET
Source: Bloomberg, Raiffeisen RESEARCH
DAX 30 Future
DAX 30 Future
Position: NEUTRAL
For now, it looks like the support area close to 7,400
would get tested out. If this level proved firm an increase
towards 8,900 would follow. However, with respect to
the strong downside momentum a break of the support
seems to be likely. Consequently, the sell-signal at 7,370
-> 6,940 – 6,750 would get triggered.
Data as of 21.06.2013, 01:10 p.m. CET
Source: Bloomberg, Raiffeisen RESEARCH
NASDAQ 100 Future
NASDAQ 100 Future
Position: NEUTRAL
The breakout from the congestion area that was established in 2012 has cleared the path for an increase
towards 3,200. The on-going setback is still above the
significant supports, thus it is not off-odds that a Measured-Move might unfold to the upside, buy 3,050 –>
3,100 – 3,200. Instead, a decline through 2,780 would
confirm a pullback into the former sideways pattern ->
2,700 – 2,570.
Data as of 21.06.2013, 09:36 a.m. CET
Source: Bloomberg, Raiffeisen RESEARCH
Stefan Memmer
36
3rd quarter 2013
Stocks
Selected industries – watchlist stocks
Sector/industry
Mcap.
Price
EUR mn
Perf.
PER
Earnings growth
P/S
-3 M
13e
13e
14f
13e
Sales growth
Div.
13e
14f
Yield
Energy
BP
GB
100.195
448,6
-2,5%
8,2
-9,5%
11,2%
0,4
-7,5%
-2,0%
5,3%
EXXON MOBIL
US
303.044
89,1
0,1%
11,1
8,1%
2,3%
0,9
-11,3%
1,9%
2,8%
PETROBRAS
BR
68.561
16,0
-14,1%
6,5
51,0%
10,9%
0,7
2,2%
3,5%
4,7%
ROYAL DUTCH SHELL A
NL
155.268
24,1
-4,3%
7,5
5,0%
-1,0%
0,4
-2,2%
-0,6%
6,0%
STATOIL
NO
49.678
124,7
-11,9%
8,1
-11,1%
5,4%
0,6
-10,5%
4,4%
5,6%
TOTAL
FR
86.264
36,3
-4,0%
7,1
-6,8%
3,8%
0,5
-4,8%
0,2%
6,6%
1,5%
Materials
ALCOA
US
6.516
7,9
-5,9%
18,8
75,8%
60,7%
0,4
0,2%
5,9%
ARCELORMITTAL
NL
14.342
8,6
-16,4%
30,3
24,0%
200,7%
0,2
-0,3%
3,4%
1,8%
BARRICK GOLD
CA
12.336
16,9
-42,9%
5,5
-24,0%
7,1%
1,2
-6,3%
5,9%
5,0%
BASF
DE
64.101
69,8
0,1%
12,0
1,9%
8,4%
0,9
-4,6%
-3,0%
3,9%
BHP BILLITON
GB
112.001
1689,5
-12,2%
9,4
12,8%
9,9%
2,1
5,3%
5,4%
4,8%
LINDE
DE
26.046
140,6
-2,3%
16,7
7,7%
12,4%
1,5
12,2%
6,6%
2,1%
RIO TINTO
GB
59.559
2649,0
-13,7%
7,6
7,4%
12,9%
1,4
8,6%
8,8%
4,4%
THYSSENKRUPP
DE
7.464
14,5
-10,6%
25,7
n.v.
124,8%
0,2
-8,5%
3,5%
1,2%
BOEING
US
57.255
98,7
16,3%
15,3
26,6%
11,6%
0,9
2,7%
9,9%
1,9%
CATERPILLAR
US
41.402
82,3
-5,0%
12,0
-22,7%
15,8%
0,9
-10,6%
6,5%
2,4%
DEUTSCHE LUFTHANSA
DE
7.037
15,3
-3,1%
12,4
376,2%
63,0%
0,2
3,4%
3,3%
3,1%
4,0%
Industrials
DEUTSCHE POST
DE
22.875
18,9
4,1%
13,0
10,2%
7,8%
0,4
4,3%
4,1%
EADS
NL
31.965
40,7
-1,7%
14,9
22,1%
34,3%
0,5
4,1%
6,7%
2,4%
GENERAL ELECTRIC
US
182.767
23,1
-0,6%
13,9
9,1%
10,1%
1,6
0,2%
2,0%
3,3%
MAN
DE
12.364
84,1
-0,3%
29,5
-14,0%
56,4%
0,8
0,1%
5,1%
2,4%
PHILIPS ELTN.KONINKLIJKE
NL
19.971
20,5
-9,8%
13,5
25,8%
19,5%
0,8
-2,9%
4,9%
3,7%
SIEMENS
DE
67.370
76,5
-11,5%
13,7
-2,6%
32,8%
0,9
-2,0%
3,7%
4,0%
2,0%
Consumer discretionary
ADIDAS
DE
16.851
80,5
-1,3%
17,8
19,5%
18,8%
1,1
3,7%
6,4%
AMAZON
US
94.738
272,1
6,3%
209,9
n.v.
146,9%
1,7
22,4%
21,7%
n.v.
BMW
DE
42.617
66,1
-4,9%
8,5
0,4%
3,0%
0,5
1,9%
4,2%
4,1%
CONTINENTAL
DE
19.434
97,2
5,0%
9,7
-13,9%
15,8%
0,6
4,1%
5,9%
2,6%
DAIMLER
DE
48.900
45,7
3,8%
10,0
-12,4%
12,6%
0,4
1,4%
6,3%
4,7%
FORD MOTOR
US
45.822
15,0
12,6%
10,6
0,0%
18,6%
0,4
7,6%
5,1%
2,6%
HENNES & MAURITZ
SE
40.854
217,1
-6,3%
20,8
2,5%
13,2%
2,8
5,9%
10,9%
4,4%
HYUNDAI MOTOR
KR
33.939 206000,0
-4,4%
6,1
7,1%
9,9%
584,1
4,3%
6,1%
0,9%
LVMH
FR
61.994
122,0
-5,9%
16,4
3,5%
12,7%
2,1
7,3%
8,7%
2,6%
MCDONALDS
US
74.778
97,5
-0,7%
17,1
6,3%
9,5%
3,4
3,4%
5,6%
3,2%
TOYOTA MOTOR
JP
152.993
5670,0
15,2%
11,2
66,8%
11,9%
780,5
13,5%
4,9%
2,3%
VOLKSWAGEN Pref.
DE
69.767
152,5
-1,9%
7,2
-54,6%
15,8%
0,3
3,7%
5,2%
2,6%
WALT DISNEY
US
86.186
62,6
11,3%
18,0
13,1%
13,4%
2,5
6,9%
6,3%
1,1%
COCA COLA
US
135.303
39,7
-1,0%
18,6
6,3%
8,7%
3,7
0,7%
4,8%
2,8%
HEINEKEN
NL
28.313
49,2
-16,7%
16,0
4,7%
12,6%
1,4
10,6%
4,5%
1,9%
L'OREAL
FR
74.178
122,7
0,6%
23,9
4,5%
8,4%
3,1
5,0%
5,9%
2,0%
METRO
DE
7.626
23,3
3,1%
99,8
n.v.
819,7%
0,2
n.v.
38,3%
0,7%
NESTLE 'R'
CH
157.753
60,1
-11,6%
17,2
5,4%
8,2%
2,0
4,2%
5,7%
3,6%
PHILIP MORRIS INTL.
US
108.203
86,5
-6,0%
15,5
7,0%
11,4%
4,4
2,5%
5,3%
4,1%
PROCTER & GAMBLE
US
160.762
76,7
0,0%
17,7
7,0%
8,4%
2,4
3,1%
3,9%
3,2%
UNILEVER CERTS.
NL
83.180
29,0
-8,7%
17,5
5,7%
9,3%
1,6
2,8%
5,7%
3,6%
WAL MART STORES
US
186.382
74,4
-0,6%
14,0
5,6%
9,8%
0,5
4,0%
4,4%
2,5%
Consumer staples
Closing prices as of 20-Jun 2013, 11:59 p.m. CET on the respective main stock exchange
Industry: The industry classification is taken from Morgan Stanley Capital International (MSCI). MCap. EUR mn: Market capitalization in terms of millions of Euros. Price: Latest available price in local currency. Perf. 3 M: Price performance over the last 3 months. PER: Price to earnings ratio; Earnings growth: Increase in earnings per share in the quoted fiscal year.
P/S: Price to sales ratio. Sales growth: increase in sales in the quoted fiscal year. Div. Yield: Current dividend yield; is intended to represent the anticipated dividend payment over
the following 12 months as a percentage of the current price.
Source: Thomson Reuters, IBES
3rd quarter 2013
37
Stocks
Sector/industry
Mcap.
Price
EUR mn
Perf.
PER
-3 M
13e
Earnings growth
13e
14f
13e
P/S
Sales growth
13e
14f
Yield
Div.
Healthcare
AMGEN
US
55.284
96,4
-0,4%
13,2
11,9%
13,8%
4,0
4,0%
2,5%
1,9%
BAYER
DE
65.445
79,1
0,1%
14,0
5,6%
12,8%
1,6
4,0%
5,5%
2,6%
JOHNSON & JOHNSON
US
183.362
85,4
7,1%
15,8
6,2%
6,9%
3,4
5,4%
4,3%
2,9%
NOVARTIS 'R'
CH
141.745
64,4
-3,5%
13,7
-4,9%
10,0%
3,2
1,4%
3,4%
3,6%
PFIZER
US
151.852
28,0
-0,6%
12,7
0,6%
5,9%
3,6
-6,1%
-1,7%
3,4%
ROCHE HOLDING
CH
153.771
219,0
0,1%
14,6
10,1%
8,0%
4,0
5,0%
3,9%
3,6%
SANOFI-AVENTIS
FR
100.672
75,6
-1,7%
12,9
-5,5%
12,4%
2,9
1,0%
5,9%
3,8%
4,7%
Financials
ALLIANZ
DE
49.630
108,9
0,3%
8,5
12,7%
3,0%
0,5
-0,6%
2,9%
AXA
FR
35.445
14,8
8,6%
7,6
7,5%
7,9%
0,4
6,2%
1,3%
5,3%
BANCO SANTANDER
ES
52.643
4,9
-7,4%
10,0
111,3%
23,5%
1,2
-1,2%
3,9%
11,6%
BANK OF AMERICA
US
105.021
12,7
2,2%
13,3
280,0%
38,1%
1,5
5,5%
1,6%
0,3%
BNP PARIBAS
FR
51.312
41,3
3,5%
8,8
-9,3%
14,1%
1,3
0,6%
2,8%
4,2%
CITIGROUP
US
110.347
47,0
5,6%
10,0
22,1%
15,5%
1,8
2,7%
2,8%
0,1%
COMMERZBANK
DE
8.025
7,0
-19,2%
14,3
-63,4%
86,8%
0,8
-1,7%
2,5%
n.v.
DEUTSCHE BANK
DE
33.701
33,1
4,9%
8,2
55,7%
17,4%
1,0
0,3%
2,0%
2,5%
DEUTSCHE BOERSE
DE
9.399
48,7
-0,4%
13,0
6,7%
11,7%
4,3
1,7%
2,1%
4,5%
ING GROEP
NL
26.054
6,8
18,1%
6,8
44,3%
12,9%
0,6
-0,4%
2,3%
n.v.
JP MORGAN CHASE & CO.
US
150.556
52,1
7,3%
9,1
10,0%
4,3%
2,0
-0,6%
2,5%
2,8%
MUENCHENER RUCK.
DE
25.000
139,4
-5,5%
8,2
-5,8%
-0,8%
0,5
2,3%
1,9%
5,2%
UBS 'R'
CH
49.470
15,9
8,0%
16,2
60,2%
30,9%
2,2
9,2%
3,9%
1,5%
UNICREDIT
IT
21.323
3,7
9,1%
18,5
38,2%
86,9%
0,9
-2,8%
2,8%
2,3%
2,8%
IT
APPLE
US
289.056
402,6
-13,1%
10,2
-10,4%
10,5%
2,2
9,5%
9,1%
FACEBOOK
US
44.848
24,3
-3,5%
42,5
7,7%
36,3%
8,7
32,2%
26,5%
n.v.
GOOGLE 'A'
US
219.930
866,2
7,0%
18,8
15,8%
15,7%
4,8
41,2%
16,9%
n.v.
INFINEON TECHS. (XET)
DE
6.750
6,2
-0,9%
28,9
-45,1%
83,2%
1,8
-3,5%
9,6%
2,0%
INTEL
US
90.793
23,9
12,9%
12,8
-12,2%
8,0%
2,2
0,4%
4,1%
3,8%
INTERNATIONAL BUS.Mchs.
US
165.354
195,0
-7,5%
11,7
9,4%
10,0%
2,1
-0,9%
2,5%
1,8%
MICROSOFT
US
215.060
33,7
19,6%
11,0
11,3%
8,3%
3,3
8,0%
5,9%
2,9%
NOKIA
FI
10.831
2,9
17,1%
361,3
n.v.
1662,5%
0,4
-11,2%
2,6%
0,6%
SAMSUNG ELECTRONICS
KR
138.023 1297000,0
-13,2%
6,1
37,7%
10,0%
874,5
19,1%
9,6%
0,7%
SAP
DE
67.641
55,1
-11,8%
16,5
9,8%
14,8%
3,8
9,2%
9,4%
1,7%
AT&T
US
144.144
35,0
-3,7%
14,0
8,3%
7,6%
1,5
1,4%
1,9%
5,2%
CHINA MOBILE
HK
150.117
75,8
-7,5%
9,6
-1,6%
-3,2%
2,0
5,5%
5,4%
4,5%
DEUTSCHE TELEKOM
DE
38.280
8,6
1,3%
12,5
16,9%
5,5%
0,7
0,8%
0,8%
6,1%
Telecommunications
FRANCE TELECOM
FR
19.088
7,2
-13,2%
6,7
-15,5%
-4,7%
0,5
-4,3%
-1,7%
10,4%
TELEFONICA
ES
44.031
9,7
-13,9%
9,0
-25,0%
4,4%
0,8
-6,0%
0,1%
7,3%
VODAFONE GROUP
GB
102.851
180,2
-3,7%
11,2
3,8%
6,2%
0,0
1,2%
0,4%
5,9%
E ON
DE
24.196
12,1
-10,9%
9,4
-41,3%
2,9%
0,2
-11,9%
1,7%
6,0%
ENEL
IT
22.436
2,4
-8,4%
7,3
-8,6%
-1,2%
0,3
-1,2%
0,6%
5,6%
GDF SUEZ
FR
35.143
14,6
-4,3%
11,0
-19,2%
5,5%
0,4
-17,5%
2,3%
10,1%
RWE
DE
14.815
24,1
-17,3%
6,1
-1,3%
-14,7%
0,3
0,5%
-0,7%
8,3%
Utilities
Closing prices as of 20-Jun 2013, 11:59 p.m. CET on the respective main stock exchange
Industry: The industry classification is taken from Morgan Stanley Capital International (MSCI). MCap. EUR mn: Market capitalization in terms of millions of Euros Price: Latest available price in local currency. Perf. 3 M: Price performance over the last 3 months. PER: Price to earnings ratio; Earnings growth: Increase in earnings per share in the quoted fiscal year.
P/S: Price to sales ratio. Sales growth: increase in sales in the quoted fiscal year. Div. Yield: Current dividend yield; is intended to represent the anticipated dividend payment over
the following 12 months as a percentage of the current price.
Source: Thomson Reuters, IBES
38
3rd quarter 2013
Acknowledgements
Acknowledgements
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Cut-off data: 20 June 2013;
This report was completed on: 28 June 2013
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