Pohjola’s analysts on looking for yield in a slow growth environment

Jarkko Soikkeli, equity strategist, and Jukka Ruotinen, head of Fixed Income and FX Research at Finland’s Pohjola outline the assets they think will perform in the current environment.

The environment

There is a fragile global economic recovery underway. Emerging economies, led by China, will once again remain the main engines of global economic growth while developed countries will plod along. The US economy will slow to around 2% and the euro area expects zero growth. The fiscal policy is still a drag on growth in developed countries. Fiscal policy adjustment has advanced more in the euro area than in the US. The current extremely easy global monetary policy will help compensate for the negative effects of fiscal policy on growth.

Jarkko Soikkeli:

In asset allocation, we will overweight equities and corporate bonds and underweight government bonds. Our recommendation for the allocation of commodities is close to neutral. According to the analysts, the recommendation is affected by reasonably positive attitude to risk appetite, return potential in equities supported by accelerating profit growth and dividends, expectations of higher long-term rates in the US and the higher return/risk potential of high-yield corporate bonds in dollars than bonds in emerging markets.

The overweight equity exposure is justified by the fact that the gradual global economic recovery will give some support to companies’ profit performance. Companies in Europe and the US are revising down their profit forecasts to a lesser extent.

Stocks have gained considerably but the continued decline in equity risk premiums as the euro crisis eases, declining trend of corrections to negative forecasts and low return expectations of alternative investments argue for our positive view of equities, explains .

Our favourite sectors for early 2013 are energy, consumer goods and construction. When it comes to other sectors, we take a more cautious view of media, forest industry and healthcare. Our favourite stocks for early 2013 are Metso Corporation, Metsä Board, Neste Oil Corporation, Nokian Tyres Plc and YIT Corporation. At the same time, we recommend avoiding the following stocks: Orion Corporation, Pöyry PLC, Sanoma Corporation, Tieto Corporation and UPM-Kymmene Corporation.


In the bond market, Pohjola expects the Riksbank to cut its key rate twice by 25 basis points and the ECB once by 25 basis points. Economic fundamentals in both Sweden and the eurozone also argue for lower money market rates and short swap rates. With respect to long-term rates, the greatest upward pressure is on US interest rates. According to the analysts, the recommended duration in the eurozone is seven years.

Jukka Ruotinen:

We expect corporate bonds to continue to gain momentum and risk premiums to continue to decline moderately. In our asset allocation recommendation, we shift to an overweight in high-yield bonds and, to a moderate extent, Investment Grade bonds. We recommend maturities of over three years. When it comes to Finnish corporate bonds, our view is that Nokia Corporation and Nokian Tyres Plc exhibit the most attractive the risk/return potential, says , Head of Fixed Income and FX Research.

Although we believe that the euro will strengthen against the US dollar in the long run, we expect the currency pair to weaken in the next few months, sent down by lowering euro rates. We also expect heightening expectations of interest rate cuts to weaken the Swedish krona. In the meanwhile, the Russian rouble will benefit from higher crude oil prices and the stabilisation of capital flows.


Pohjola’s favourite commodity is crude oil due to geopolitical risks and the constrained demand/supply picture. A positive macroeconomic sentiment is also a driver for movements in crude prices. It is possible of investors to benefit from this because the forward curve for crude oil market price development is declining. The change of power in China will, for its part, foster developments in investments in the country and thus demand for base metals too. Pohjola’s analysts keep, however, commodity allocation neutral because of the risks associated with the prices of natural gas and agricultural products.


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