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05.04.12

Eurozone: Have the acute risks been averted?



  • Eurozone GDP to grow by 1.1 per cent again in 2013; 2012 decline by 0.5 per cent; low point of recession already reached
  • Eurozone debt crisis: financial markets focusing more on political environment
  • Growth in emerging markets passes low point, no hard landing in China
  • Upward trend on stock markets continues at slower pace
  • Asset allocation: Overweighting of shares compared to bonds


The analysts at Raiffeisen Bank International AG (RBI) note the frail arrival of spring in the eurozone. Survey indicators have tended to show a discernible improvement since the winter months. That is in line with our existing forecast that growth will resume in the eurozone from the second quarter, explains Valentin Hofstatter, Research expert at RBI. On average, however, he is expecting economic output in the eurozone to shrink by 0.5 percent in 2012  to be followed by a marked improvement from 2013. Hofstatter expects GDP growth for this year to reach 1.1 per cent.

The large emerging market economies outside Europe seem to have passed the low point of economic activity, reports Raiffeisen Research expert Veronika Lammer. The gradual loosening of monetary policy in China and the wide range of fiscal measures being taken will enable the country to exceed slightly the official growth target of 7.5 per cent. Brazil has slashed interest rates and is holding the Real at a relatively weak level in order to stimulate domestic demand.


Divergence increasing between core and peripheral euro states

Raiffeisen Research assumed a slight economic growth this year and their expectations were confirmed  despite the supportive measures of the European Central Bank (ECB), which have reduced the risks in the financial sector. It is interesting that the divergence is continuing to grow between the core euro countries clustered around Germany and the peripheral euro states. The GDP estimates for all countries along the southern flank had to be corrected further into negative territory, says Hofstatter.


Eurozone debt crisis: financial markets focusing more on political environment

The analyst expects that  in the second quarter of 2012  European politics will, for the first time in months, have the political environment more in the focus than they did at the beginning of the year. Hofstatter primarily sees the elections in France and Greece as the next major topics to have an effect on Europes political development: Everything about the elections in France points to a change in power. More than just political stability is at stake in the parliamentary elections in the crisis-hit Greece. At EU level, Hofstatter considers previously announced measures like the strengthening of EU/IMF rescue mechanisms or the ratification of the fiscal compact as major issues. The analyst also believes that a second aid package for Portugal could become an issue as the year progresses.


USA: GDP growth of 2 per cent due to better situation on the labour market

With regard to the economic situation in the USA, Hofstatter is raising his forecast for 2012 from 1.5 per cent to 2 per cent, due to the improved situation on the labour market. However, we are only expecting economic dynamism to increase in the second half of the year, though it will not be very strong, says the Research expert.


Further expansive steps by the ECB not expected in the coming months

The past few months have shown that the measures taken by the ECB have been effective. The cuts in the key interest rate at the end of 2011 and above all the generous provision of liquidity to the banks have significantly reduced the stress in the financial system and sharply reduced the risk of a credit crunch, says Hofstatter. Therefore he does not expect that there will be any further expansive steps by the ECB in the coming months, such as cuts in the key interest rate or a further expansion of loans to the commercial banks: On the contrary, parts of the expanded range of measures have not been used at all, such as the purchase of government bonds. Others have only half-heartedly been used, such as purchases of collateralised bank bonds, and should probably only be required again in an emergency. Overall, he expects a period of low interest rates with continuing high levels of liquidity provision.


Euro: Low exchange rate fluctuation against USD and CHF

Due to a low fluctuation in the yield differentials between USD and Euro over the short and long term, the analysts at RBI anticipate little fluctuation in the exchange rate between 1.30 and 1.35. According to Hofstatter, the most likely scenario for CHF is that EUR/CHF will stick at just over 1.20.


European government bonds and corporate shares expected to perform well

For Research expert Veronika Lammer, the good economic environment in the eurozone suggests that corporate bonds will continue to perform well: Although there is a risk of a correction or sideways movement, we see much greater potential here than on the money market. The analyst actually expects the risk premiums on corporate loans to continue to fall in the long run, as several uncertainty factors have already been priced in.

The growth in turnover and profit at US companies continues to be very robust. The expectations of analysts have been surpassed every quarter since the beginning of 2009. For this year, corporate profits are expected to grow by 9 per cent. The expert is also optimistic about shares in the eurozone: The markets suffered hugely in recent years from resurgent concerns over the debt crisis in the eurozone and are therefore at low valuation levels. As profit expectations slowly rise again, there are opportunities here to make long-term purchases. For emerging markets shares, Lammer sees further high long-term growth potential, with concerns over a possible hard landing in China causing uncertainty amongst investors in the short term. This could produce good entry prices in the coming weeks, with a rebound in the Chinese stock market supporting shares across all emerging markets, says the analyst.

According to a model developed by Raiffeisen Research, the gold price should rise again by the end of the year, supported above all by the continuing low real interest rates. In the short term, the comparatively low speculative positions of the hedge funds suggest it might soon be a good time to get back into the market, explains Lammer.


Asset allocation: Overweighting of shares compared to bonds

The recovery of gains from shares and the improvement in expectations for economic activity have led us to overweight shares compared to bonds. However, as the risk of the debt crisis flaring up again has not yet been averted, the overweighting is only very slight, says Lammer. The portfolio is therefore composed of 53 per cent shares, 5 per cent property and 42 per cent bonds, with the money market investment kept at low level.


Raiffeisen Bank International AG (RBI) regards both Austria, where it is a leading corporate and investment bank, and Central and Eastern Europe (CEE) as its home market. In CEE, RBI operates an extensive network of subsidiary banks, leasing companies and a range of other specialised financial service providers in 17 markets.

RBI is the only Austrian bank with a presence in both the worlds financial centres and in Asia, the groups further geographical area of focus.

In total, around 59,000 employees service about 13.8 million customers through around 2,900 business outlets, the great majority of which are located in CEE.

RBI is a fully-consolidated subsidiary of Raiffeisen Zentralbank Osterreich AG (RZB). RZB indirectly owns around 78.5 per cent of the common stock, the remainder is in free float. RBIs shares are listed on the Vienna Stock Exchange. RZB is the central institution of the Austrian Raiffeisen Banking Group, the countrys largest banking group, and serves as the head office of the entire RZB Group, including RBI.

For further information please contact: Ingrid Krenn-Ditz (+43-1-71-707-6055, ingrid.krenn-ditz@rbinternational.com) or Alexandra Jocham (+43-1-71-707- 5627, alexandra.jocham@rbinternational.com).

www.rbinternational.com, www.rzb.at

 

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