We assess the outcome of the latest EU summit as positive, in view of the solution found for rescuing the Spanish banking system. European politicians have demonstrated their ability to take action in line with their growth initiative. This could represent a significant step towards conquering the European debt crisis....
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Against the backdrop of the outcome of the summit, we weight European shares somewhat higher due to their attractive pricing.
In the short term at least, for shares, we expect the high degree of risk aversion to abate, following a decline in the political risks emanating from Europe. However, it is impossible to predict whether the recently ended summit will actually be the last in the series of European crisis summits or whether the situation in the markets will deteriorate further. After the initial neutral weighting, European shares are weighted somewhat higher. The existing overweight position in US shares will be maintained since the economic recovery on the other side of the Atlantic is progressing steadily despite some setbacks. The minimal overweights in Latin America and Asia (apart from Japan) will be reduced to neutral due to the slight downturn in the economy; this is good for Japanese shares which, following falling share prices in the second quarter of 2012, are now just as attractive as they were at the lowest point in 2009.
Currencies
The Swiss franc remains substantially overvalued compared to all other currencies. In our allocation, we initially adopted an overweight position in US dollars. This overweight is to be halved following a positive development.
Turning points
The promising outcome of the latest crisis summit is represented by the support for Spanish banks without burdening their home country’s national budget and the assurance that all investors will be treated equally in case of a future capital writedown. The communitarisation of European debt has therefore crept in by the back door, so to speak, without the introduction of Eurobonds, which was vehemently opposed by Chancellor Merkel (“No Eurobonds as long as I live”). In view of this development, there could be a recovery of interest rates in Germany – yields at the long end of the market have already begun to rise from an extremely low level. At the same time, the economies of the crisis countries could be about to reach or already have reached rock bottom.
Source: ETFWorld – Swisscanto (Thomas Härter – Head of Investment Strategy)
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