November 2013: SC – Only European equities remain undervalued

The economic outlook has continued to brighten. In Europe, leading indicators clearly confirm that Europe has emerged from recession, which has already sparked speculation that economic recovery could be stronger than previously expected. Yield premiums for Spanish and Italian government bonds have continued to narrow; the issue of a European debt crisis is currently off the agenda. Equities in European peripheral countries continue to be significantly undervalued after exiting recession; corporate value can currently be purchased inexpensively in Milan and Madrid. In the US, the most recent labour market data painted a weak picture, and we are once again experiencing a phenomenon in which weak US economic data provides further impetus for stock exchanges, as the data suggests that the planned tapering (i.e. reduction in bond purchases by the US Federal Reserve) could be postponed further. It is questionable whether such a postponement will be welcomed by the markets as much as previously. Currently, three deferred decisions on the financial and monetary policy agenda in the US are being deferred until after the New Year: the end of the transitional budget (15 January), increasing the debt ceiling (7 February) and the ongoing tapering, which is now only expected to be implemented from 1 February 2014 after the Fed’s new Chair, Janet Yellen, takes office.

Bonds: Emerging market debt returns to neutral weighting
Emerging market currencies and bonds came under strong pressures during the summer months during the tapering discussion. In contrast, since September they have been able to profit from the postponement of the tapering. Emerging market debt is not currently cheap, but it is no longer as expensive as before the correction began. We have therefore brought our tactical underweight back to a neutral weighting. The postponement of tapering and increases in interest rates have temporarily taken the pressure off the bond markets; in principle, we expect interest rates to increase further.

Currencies: dollar surprisingly weak
Recently, the US dollar has been unexpectedly weak against the euro and Swiss franc. The recent appreciation of European investments is currently giving the euro a boost. The deferral of the decision regarding the budget and debt ceiling until January/February 2014 is a homegrown problem for the US dollar. In terms of purchasing power parity, the US dollar is not only strongly, but extremely strongly undervalued against the Swiss franc due to its weakness in recent weeks; we are waiting for the upcoming countermovement and maintaining our long dollar position.

Equity markets: only Europe remains undervalued
Since the financial crisis, the equity markets have moved upwards significantly, removing any undervaluations that may have existed in recent years. Any further price increases from this point would only really be justified by the growth in profits, which is expected to be around six per cent in long-term funds. In the past, however, prices have often tended to significantly exceed this “reasonable” amount. Europe is the only region currently still exhibiting significant undervaluation. Since the economic turnaround, there has been a sharp rise in interest in euro zone equities that have previously been practically ignored by international investors.