European turnaround requires patience
Zurich, 2 May 2013 – The global growth outlook deteriorated slightly in April. The downstrokes mainly concern the euro area and China; the outlook for the USA still remains quite good. However, we are retaining our overweight in European equities because of the attractive valuations. The surprisingly clear correction in commodity prices caused us to reduce our optimistic position in commodities to a neutral posi-tion.
Ostensibly, the strains caused by the Cyprus crisis and the elections in Italy appear to have been digested on the markets in the meantime. Yet there still aren't any figures available that provide information about possible capital movements as a result of the Cyprus crisis. Clarity will only be given with the next data on the Target2 balances. The European Central Bank (ECB) has so far declined to respond to the flood of money, with which the Bank of Japan has entered the international devaluation race. Since the ECB has new room for manoeuvre as a result of declining commodity prices – and thus falling inflation expectations – we expect to see further monetary policy actions from the ECB. An imminent rate cut, however, is likely to be already priced in.
We remain convinced by European equities
Our bet on the strong undervaluation of European equities has not yet panned out – but in our opinion it is only a matter of time, because our valuation models indicate that the under-valuation of European equities has assumed an extent that is particularly prominent by his-torical standards. In anticipation of an upcoming turnaround and normalisation of this pricing anomaly, we are maintaining our overweight in European equities.
Global liquidity competition preventing interest rate turnaround
All major central banks continue to be very expansive. The available liquidity again caused price increases and corresponding drops in yields for high-quality bonds around the world. However, bonds from the European periphery and the Emerging Markets and corporate bonds of varying quality were again snapped up. While investors in bonds are being a little less selective in their approach, they appear extremely fussy towards equities and clearly prefer more defensive stocks.
The bubble has burst for gold
The biggest surprise in the last month was provided by gold. An orderly consolidation trans-formed into a complete collapse. Exchange Traded Funds, with their billion-dollar gold hold-ings, liquidated substantial stocks. And with this, the gold bull market of the past few years came to an end. Other important commodities also recorded sharp price declines. Pessimists are now assessing these price declines as a harbinger of further economic stagnation. Opti-mists point out that lower commodity prices result in falling input prices and so keep the infla-tion potential in check. We are reducing our overweight in commodities to neutral and in turn are expanding the slight overweight in hedge funds.
Investors turning their backs on zero returns
After the money market account, gold is now turning out to be a reasonable investment alter-native. However, low priced equities still represent a reasonable investment alternative – even if investors, in the case of Europe, have yet to bite into a bad apple. Investors in Swiss equities (SMI +15% YTD) can reap rewards in the year to date. The Eurozone still finds itself in a turnaround situation. Associated uncertainties are keeping equity valuations very low so far; staying power is demanded from investors. However, a bit of patience will pay off.
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Head of Investment Strategy
Phone +41 58 344 49 46
Swisscanto Asset Management AG