Pohjola’s analysts Jarkko Soikkeli and Jukka Ruotinen see signs of life in the eurozone
Jarkko Soikkeli, equity strategist, and Jukka Ruotinen, head of Fixed Income and FX Research at Finnish bank Pohjola, part of OP-Pohjola Group, have concluded that they see signs of life in the eurozone once more.
The world economy continues its faint recovery. The greatest positive surprises during the current year have come from Japan and the euro area. Euro-area GDP rebounded, driven by Germany, as early as the second quarter of 2013 and business barometer surveys among the corporate sector suggest that growth will gain momentum towards the year end. Emerging economies have shown markedly weaker-than-expected growth but the BRIC economies have shown signs of stabilising growth right during the last few weeks, with the exception of India.
The improvement in the world economy and, in particular, the euro-zone economy will support risk-taking although monetary and geopolitical uncertainties still cast a shadow on the outlook. Our risk indicator is still at a high level and returning from that level has, however, historically generated the best returns. So, we are now taking a positive view of equities, High Yield corporate bonds, emerging-market bonds and commodities, state the analysts.
“When it comes to equity markets, we take the most positive view of European equities and we believe that the profit forecasts of the related companies react with a time lag to the turn for the better,” says Jarkko Soikkeli, equity strategist.
“We consider any potential turbulence to provide a good opportunity to increase equity risk. A substantial increase in interest rates has added fears of whether equity valuations are on a solid basis. On the basis of the previous interest rate cycles, it is, however, difficult to conclude that the recent rise in real interest rates would threaten development in equity markets. The sector rotation underway will probably support equity prices particularly in cyclical industries and the financial sector where predicted profitability is the weakest of all relative to the historical level.”
“In Finland, our favourite sectors include the financial sector, the capital goods sector, the consumer goods sector and the construction industry. We take a more cautious view of the IT sector, the forest industry, the consumer non-durables sector and the media industry. Our favourite stocks for the rest of 2013 include Cargotec Corporation, Cramo Plc, Nokia Tyres plc, Outotec Oyj and Sampo plc. At the same time, we recommend avoiding the following stocks: Caverion Corporation, Kemira Oyj, Lassila & Tikanoja plc, Sanoma Corporation and Stora Enso Oyj,” continues Soikkeli.
Pohjola’s analysts expect the September Fed Board meeting (on 18 September) to decide on scaling back quantitative easing in fixed-income markets. In fixed-income markets, particular interest is, however, directed to the Fed’s interest rate forecasts for 2016 because the Fed can use them to present a strong argument against the optimistic future path of interest rates felt in the market. The analysts expect the ECB to conduct long-term refinancing operations (LTRO) towards the year end in response to the drain of excess liquidity within the euro system. According to the analysts, the recommended duration in the euro zone is five years.
“Although we do not expect interest rates to any longer continue to increase during the rest of the year, in the current environment we favour High Yield corporate bonds due, for example, to the protection their risk premiums give against interest rate swings,” says Jukka Ruotinen, head of Fixed Income and FX Research.
“Foreign exchange markets will see the biggest movements in the currencies of emerging economies and we expect, for example, the Russian rouble to gain strongly against the euro as global economic growth stabilises. Our view of the euro’s weakening against the US dollar is based on the expectation of the interest rate differential moving against the euro and of fading positive economic surprises in the euro area. Following the difficult first half of 2013, prospects for commodities are considerably brighter because demand for base metals, for example, will be boosted by the accelerating global economic growth.”