Worsening economic indicators for the euro area and the difficult situation in Spain, in particular, require a more cautious position...
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The markets’ focus has returned to the European debt crisis. At the same time, market players are looking mainly to Spain, where the recent credit rating downgrade by Standard & Poor’s has exacerbated the situation. The Spanish banking system, undercapitalised as a result of the housing crisis, is cause for concern. We estimate that the ECB will likely not restart support purchases if the interest rate for ten-year Spanish government bonds rises above seven per cent. The run-off in the French presidential election is likely to have an impact on the markets. Should François Hollande win, differences of opinion with Germany regarding austerity measures in national budgets are inevitable, which would be bad news for the markets. Therefore we are reducing our equity weighting in Europe.
A bit more caution in corporate bonds
In the corporate bonds segment, ratings continue to be attractive even in the high-yield sector; however, the quality of issuers has deteriorated slightly overall. In addition, there are some technical factors, such as the number of new issues or the liquidity in the market, that appear less favourable, so that we are now positioning ourselves slightly more defensively and taking partial profits. As for government bonds, the significant underweight position in securities from Spain and Italy remains in place. In bond portfolios in the currencies EUR, GBP, USD and CHF, we are mindful of a slightly shorter duration.
The mainly favourable assessments given to the European stock markets call into question an even greater reduction in overall risks. Much of the negative news that has been expected is likely to already be included in prices. Moreover, we are noticing a renewed positive trend in earnings revisions. We favour value stocks over growth stocks. Although our share quota for the euro area has been scaled back, it remains overweighted together with the US and emerging markets. At the sector level, we favour the food and beverage, healthcare, banking, software and energy sectors amongst others, whereas we are underweighted in insurance, telecoms and utilities.
There are no major changes in the currency strategy to report, hence the overweight in the USD and NOK against the CHF remains. The American currency is undervalued and is benefiting from movements into safe havens, while the Swiss National Bank is defending the floor of CHF 1.20 to the EUR. The NOK is expected to appreciate if oil prices continue to rise.
Source: ETFWorld – Swisscanto (Thomas Härter – Head of Investment Strategy)
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