Download » more - eqestar capital

Bond, currency and equity outlook for the second quarter
May 23, 2015
© Eqestar Capital 2015
•
•
•
•
Japan disaster and crisis in Libya depress first quarter
Europe / USA: Economy continues on growth path
Opportunities for risk tolerant investors
Focus stays on high levels of government indebtedness
The first quarter was weighed down by the unexpected events in the Arab world and the disaster in
Japan. Nonetheless, the response on global financial markets to the effects of the earthquake in
Japan and the entailing nuclear disaster has been relatively moderate to date. Despite these events,
GDP growth in Europe and the US will continue in 2011. In Japan, a recessionary phase may set in
due to the enormous costs; in the euro area, the growth disparity between North and South remains
intact. The low-interest environment supports the continuation of the moderate economic recovery.
In the emerging markets (Latin America, Asia, CEE), real growth will be higher by comparison. Higher
government indebtedness has shifted into the background as a consequence of current events, but
will not disappear from the radar of the capital markets.
ECB will probably raise key lending rate, FED continues to wait
The euro zone profited in the first phase of economic recovery - especially due to demand from
abroad. This year, especially domestic demand might make a solid contribution to GDP growth. The
average utilization of production capacities has reached a level that permits us to expect a positive
investment dynamic, and therefore, also impulses for employment. “The consolidation of
government budgets could have a dampening effect on the economy,” explained Gudrun Egger,
Head of Major Markets & Credit Research at Erste Group. Despite moderate economic growth,
inflation has already risen faster than expected. “This is attributable mainly to higher energy and
food prices.” The ECB already adopted a harsher tone at its press conference at the beginning of
March, and is set to raise the key lending rate on 7 April by 25 basis points. This move is intended to
dampen the growing inflationary expectations in time. Yields already reflect the imminent interest
rate hikes. “As we forecast gradual interest rate moves of 25 basis points as a maximum per quarter,
we expect bond markets to be only slightly weaker in 2nd quarter,” explained Ms. Egger.
Solid economic growth is forecast in the US for the second quarter. The estimates of the analysts at
Erste Group state rates of around 2.5% to 3% for 2011. This is essentially in line with the pace of the
last few quarters. The Fed, the US central bank, has already declared itself and referred to the latest
rise in inflation as only temporary. Therefore, the Fed does not perceive any need to take action at
present. The greatest risk for government bonds is viewed as a loss of confidence among
international investors – caused by lacking budget consolidation. We only expect long-term yields to
rise sustainably above the levels already reached this year as soon as the central bank starts to hike
interest rates again around the close of 2011. There is still no clear trend in the exchange rate of the
euro vs. US dollar.
Equity markets: Overweight US and CEE
Europe: The diverging performance seen recently widened even more among the individual sectors
in the Stoxx 600 index. Therefore, the change in earnings expectations relative to the price trends of
the sectors has reversed for the first time in two years. European equities (developed Europe)
should be underweighted in a global portfolio. However, upwards earnings revisions clearly pointed
in favour of CEE equities. For this reason, investors should overweight East European equities in a
Europe or global portfolio.
US: The continued positive stock trend will depend heavily on the widening of the total assets of the
US central bank. Currently, the QE2 programme is under way according to which the Fed buys,
among others, government bonds from investors and in this manner supports the bond markets.
Apparently, the funds obtained from these purchases are finding their way into the equities market.
The outlook for US stock indices in the coming quarter may be assessed as slightly positive. The
uptrend at the start of the second quarter will continue, but the dynamic will slow. As regards sector
developments, especially in the energy sector, above average performance is expected. For now
though, the solid corporate earnings will outweigh the negative ones by far, thus keeping sentiment
positive.
Japan: In the second quarter, insecurity will persist in Japan. This insecurity is expected to abate
slowly. One may expect the panic in the stock markets to gradually give way to a more realistic view
of the situation. The attractive valuations of Japanese stocks continue to be an important pillar of
support for equity markets. Therefore, we do not expect the performance of the leading index to
diverge much from established stock markets and recommend a neutral weighting of Japanese
equities.
-
Ends
-
About Eqestar Capital
We are a global firm with industry-leading private equity experience, in-depth industry knowledge,
sophisticated processes for growing and improving businesses, and a strong culture committed to
teamwork and sharing information across offices in the U.K., Europe, and Asia. Eqestar Capital
specializes in buyouts. We have a history of achievements in private equity. We have continued our
history of innovation by establishing new strategies that leverage the power of our brand and the
intellectual capital in our private equity business. We sponsor and manage funds and accounts that
make investments in fixed income and other strategies. We also engage in capital markets
transactions and other activities that capitalize on the experience of our knowledge
© Press Release 2011