Pohjola's analysts: Risks are still extraordinarily great - underweight position in equities
(Thomson Reuters ONE) -
According to Pohjola Markets' analysts, the optimistic mood in the global
economy early in the year is gone and there is extraordinarily great uncertainty
over sustained economic growth. There is a growing risk of a new financial
crisis and the greater uncertainty is about to be reflected in both corporate
and consumer decisions. The aggressive tightening of fiscal policy would cramp
economic growth although fiscal consolidation is indeed a prerequisite for
sustained growth in the long term.
The big question in the next few months is how the world economy will grow as
the financial system is coughing. In the USA, poor employment figures and the
weaker corporate sentiment have increased the risk of a probable recession. In
the euro area, business activity is slowing from its high level early in the
year but the question mark still is how severe this slowdown will be. Economic
development in emerging markets varies strongly but in the main their economies
have remained on a vigorous growth path.
A crucial question from the investment strategy perspective is whether euro-area
economies can get control of the sovereign debt crisis and at what cost. Our
basic scenario still assumes that politicians will find the way of how the euro-
area banking system will be rescued, although managing the debt crisis will take
many years. The greatest risks and opportunities are associated with solving
this problem.
Uncertainties caused by the debt-ridden Southern European economies have
considerably affected recent developments in the European banking sector. If
European banks had to write down their PIIGS bonds, we estimate that they would
need more capital worth 92-185 billion euros. Much of this capital will be
needed by the PIIGS nations, and we estimate that this recapitalisation will
work through the extended EFSF.
Stock valuations are attractive but before general risk aversion decreases and
fears of a recession fade, there will be limited opportunities for a long-term
increase in stock prices. Consequently, we will continue our tactical
underweight during the second half of the year until there are nascent signs of
solving the European sovereign debt crisis.
We expect the ECB to cut its main refinancing rate twice (50 basis points in
total) during the next six months. The Riksbank and Norges Bank too are likely
to follow suit.
We expect the ECB's expected rate cuts to force the EUR/USD rate down to the
level of 1.31 by the end of this year. The CHF bottom and fears of JPY
intervention will provide potential for a stronger US dollar in the absence of
other safe-haven currencies.
In asset allocation, we will adhere to a tactical underweight position in
equities and a neutral position in government bonds. When it comes to fixed-
income instruments, we recommend short duration. We will shift to an overweight
in Investment Grade corporate bonds and to an underweight in High Yield bonds.
Because of the great uncertainty, we will move overweight cash.
Our favourite stocks for the rest of 2011 are as follows: Kemira Oyj, Huhtamäki
Corporation, Stora Enso Plc, Fortum Corporation and TeliaSonera. According to
our view, stocks that should be avoided include Uponor Corporation, Talentum
Oyj, Talvivaara Mining Company Plc and Tieto Corporation.
In corporate bonds, we favour defensive bonds issued by energy companies and
technology companies and operators. Our favourite issuers of corporate bonds
include Statkraft, Ericsson and Telenor. We recommend avoiding the banking and
forest sectors in corporate bonds.
For more information, please contact:
Jarkko Soikkeli, Equity Strategist, tel. +358 (0)10 252 8685
Jukka Ruotinen, Head of Fixed Income and FX Research, tel. +358 (0)10 252 2792
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Source: Pohjola Pankki Oyj via Thomson Reuters ONE
[HUG#1551437]
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Datum: 03.10.2011 - 08:30 Uhr
Sprache: Deutsch
News-ID 71590
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