Equity overweight still justified, say Pohjola analysts

Jarkko Soikkeli, equity strategist, and Jukka Ruotinen, head of Fixed Income and FX Research at Pohjola Bank in Finland, argue that global economic recovery suggests that investors are right to take an overweight equity stance, and seek out higher yielding corporate bonds.

“The positive economic sentiment in the USA and the world economic recovery will support risk-taking and so we are still taking a positive view of equities and especially High Yield corporate bonds in the bond market,” they state.

“The stock market rally has substantially raised market valuations. We think, however, that improved risk sentiment, expectations of accelerating global economic growth and weak returns on alternative investments justify the overweight equity allocation.”

As a result of the improving economic backdrop, Soikkeli points to sectors that offer a combination of improved earnings potential and reasonable valuation as ones to seek out. In Europe this includes automobiles, household goods and technology. Industrial goods and services also have potential.

“Our favourite Finnish stocks for early 2013 include Cargotec Corporation, Metso Corporation, Metsä Board, Nokian Tyres Plc and Uponor Corporation. At the same time, we recommend avoiding the following stocks: Elisa Corporation, Tieto Corporation, UPM-Kymmene Corporation and Wärtsilä Corporation,” says Soikkeli.

Fixed income

In the area of fixed income, the analysis points to investors expecting a Federal Reserve rate hike sooner rather than later.

For the eurozone, the recommendation is for investors to seek out duratino of five years.

“We expect the US dollar to strengthen against the euro when the Fed is under higher pressure to raise the key rate. We anticipate that emerging economies will strengthen in the global economic slipstream, but the emerging economies’ currencies are still waiting to see an improvement as a result of the Fed’s pressure to raise its key rates. The accelerating inflation rate in the USA and the accelerating global economic growth will support investment-led recovery in the commodities markets. In Europe, price prospects for electricity, coal and emissions allowances are anaemic,” says Ruotinen.

“In the current market environment, we favour High Yield corporate bonds more than Investment Grade bonds because of their higher risk premium potential and a better hedge against interest rate movements. In terms of company fundamentals, we see corporate bonds issued by the following Finnish companies as the most valuable: Cramo Plc, Nokian Tyres plc, PKC Group Plc, Ramirent Plc and Tieto Corporation. In our view, the yield of corporate bonds issued by Elisa Corporation, Neste Oil, Nokia Corporation, NSN and SRV to the least attractive in relation to corporate credit rating, continues Ruotinen.”

 

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