The cyclical upswing in the global economy is intact although momentum will weaken significantly in the second half of the year. Falling leading indicators, sovereign risks (all eyes on Greece) and an only slightly improved labour market indicate that the recovery in the euro zone and in the US will slow. On the flip side, inflation remains at a low level in all three of the major economic areas (US, Japan, Europe) as a result of the necessary restructuring of public finances. In the view of ERSTE-SPARINVEST, increases in key interest rates in Europe for 2011 as a whole are “not an issue”. The global economy continues to be underpinned by the momentum in emerging markets: in its investment outlook for the second half of the year, ERSTE-SPARINVEST forecasts that China, India, Russia and Turkey will remain the primary engines of growth.
In its investment strategy for the second half of the year, ERSTE-SPARINVEST mainly favours the following:
- corporate bond funds, predominantly in high-yield bonds (e.g.: ESPA BOND EUROPE HIGH YIELD)
- emerging market bond funds, preferably in hard currencies
- actively managed asset allocation funds
(e.g.: ESPA PORTFOLIO BALANCED 50)
"The path has become bumpier, the opportunities are becoming more selective", says Heinz Bednar, Chairman of the Managing Board of ERSTE-SPARINVEST, summarising the framework conditions on the capital markets. He expects moderate growth in the fund sector for the second half of the year, albeit not to the same extent as in the previous year, when investors encountered extraordinary opportunities.
ERSTE-SPARINVEST Head of Bond Funds Fleischer:
no inflation risks in sight
Although the global economic indicators remain in line with the “cyclical upswing” which began in spring 2009, the fall in some leading indicators points to a slowdown in momentum. The increase in sovereign risks (particularly in Europe) and the weak labour market have also heightened the uncertainty, explains Alexander Fleischer, Head of Bond Funds at ERSTE-SPARINVEST. These factors will ensure that rates of inflation in the US and in the euro zone remain low for the foreseeable future.
Due to the impending consolidation of national budgets in some major countries, the respective monetary policies of the central banks in question (Fed, BoE, ECB, BoJ) will remain very expansive. The same applies in particular to the ECB, which provides the banking system with strong levels of liquidity. Fleischer comments: “The ECB will now certainly not jeopardise the fragile balance by adjusting interest rates.” Throughout the “rest” of the world, key interest rates will be cut earlier although on a more gradual basis.
The bond market will therefore remain well supported in the second half of the year. High-yield and emerging market bonds have become more attractive over recent months. Uncertainty surrounding the creditworthiness of highly indebted countries has led to increased risk premiums, i.e. lower prices for risk-carrying securities and higher prices for safe government bonds (German and US government bonds). At the same time, risk appetite amongst investors has decreased.
The continued economic recovery, albeit at a lower level, low inflation in the developed world and the expansive monetary policy favour high-yield corporate bonds and emerging market bonds. The economic growth in emerging markets remains much greater than that in the developed markets even if momentum is slowing. Despite the risks of inflation having fallen, they remain higher than in the developed world. The level of interest rates is therefore also higher on average. The creditworthiness of issuers is improving, both in absolute terms and in comparison to developed markets, while emerging markets (hard and local currencies and local bonds) remain attractive.
Recommended fund: ESPA BOND EUROPE HIGH YIELD (AT0000805676)
The ESPA BOND EUROPE HIGH YIELD invests primarily in bonds which are issued by European companies in hard currencies. Foreign currency risks are permanently and fully hedged against the euro. The issuers’ rating is predominantly in the high-yield area (Ba and lower). The portfolio is broadly diversified with over 100 separate securities in the funds. The fund has performed convincingly over the last five years, gaining more than 18 per cent.
ERSTE-SPARINVEST investment strategist Severin: Growth stems primarily from emerging markets
In terms of equities too, the momentum is primarily in emerging markets. “If investors want to generate above-average returns over the next five to ten years, then that is where they need to invest”, stresses Paul Severin, investment strategist at ERSTE-SPARINVEST. Although the markets are prone to corrections in the short term, any long-term equity strategy will have to take account of emerging markets. In the first half of the year, most equity indices returned a negative performance. Thanks to the surprising trend in the dollar, some indices (MSCI World: +3.8 per cent, MSCI Emerging Markets +9.5 per cent) recorded gains despite the turbulence in Greece.
With an estimated P/E ratio of 13.1 (2010, basis MSCI World), ERSTE-SPARINVEST believes that equities are favourably valued. Companies’ earnings performance has been surprisingly positive over the last three months and the return on equity is clearly on the increase, according to Severin. Market-related factors are currently having a negative impact and the level of many local indices has fallen below the long-term average. The consolidation may be maintained during the summer months. In relative terms, European equity markets and emerging markets are the most attractive for ERSTE-SPARINVEST, and the rating for Japan has also improved. At sector level, industrial stocks, consumer stocks and pharmaceuticals are appealing.
Overall, the share of equities in the mixed funds managed by ERSTE-SPARINVEST is currently at a neutral level. Commodities should continue their upward trend if an improvement in the economic situation becomes clear.
The recommended fund for investors wishing to exploit summer corrections in order to build up equity positions is the ESPA PORTFOLIO BALANCED 50 (ISIN AT0000724190). This is an absolute return fund, which invests between 0-50 per cent in equity funds, between 50-100 per cent in bond funds and up to 10 per cent in alternative investment strategies. With a five-year performance of 3 per cent, it has coped well with the sharp slump during the financial crisis.
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Photo: Chairman of the Managing Board of ERSTE-SPARINVEST Heinz Bednar: "The path has become bumpier, the opportunities are becoming more selective."
Photo: Bruckner, reproductions free of charge, copyright ERSTE-SPARINVEST
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Photo: ERSTE-SPARINVEST Head of Bond Funds Alexander Fleischer: "No inflation risks in sight"
Photo: ERSTE-SPARINVEST
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Photo: ERSTE-SPARINVEST investment strategist Paul Severin: "If investors want to generate above-average returns over the next five to ten years, then they need to invest in emerging markets",
Photo: Hinterramskogler, reproductions free of charge, copyright ERSTE-SPARINVEST
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ERSTE-SPARINVEST, Presse- und Öffentlichkeitsarbeit
1010 Wien, Habsburgergasse 1A,
Telefax: 0043 (0) 50 100 DW 17102
Dieter Kerschbaum, Tel. 050 100 DW 19858,
e-mail: dieter.kerschbaum@sparinvest.com
Regina Haberhauer, Tel. 050 100 DW 19860,
e-mail: regina.haberhauer@sparinvest.com
ERSTE-SPARINVEST Kapitalanlagegesellschaft m.b.H.
Sitz Wien, FN 81876 g, Handelsgericht Wien, DVR 0550922
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