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Pohjola's analysts: Yielding returns in a slow growth environment


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Copyright © Thomson Reuters 2013. All rights reserved.
2013-01-28 09:03:43 -

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 USA. The current extremely easy global monetary policy will
help compensate for the negative effects of fiscal policy on growth.

- 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 USA 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 USA 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 Jarkko Soikkeli, Equity Strategist. - 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, continues Soikkeli. In the bond market, Pohjola's analysts expect 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. - 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 Jukka Ruotinen, 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. Our 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. For more information, please contact: Jarkko Soikkeli, Equity Strategist, tel. +358 (0)10 252 8685 Jukka Ruotinen, Head Fixed Income and FX Research, tel. +358 (0)10 252 2792 Jarkko Soikkeli and Jukka Ruotinen will discuss capital markets in OP-Pohjola Nyt (OP-Pohjola Now) broadcast on 28 January 2013, starting at approximately 2 pm at op.fi > OP-Pohjola-ryhmä > Uutishuone Pohjola Bank plc Pohjola is a Finnish financial services group which provides its corporate and institutional customers with a diverse range of banking, non-life insurance and asset management services and private individuals with an extensive range of non-life insurance and private banking services. Pohjola Bank plc (Pohjola) is part of OP-Pohjola Group, the leading financial services group in Finland. Pohjola acts as the Group's central bank and is responsible for the Group's international operations. OP-Pohjola Group consists of over 200 member cooperative banks and the Group's central institution, OP- Pohjola Group Central Cooperative, with its subsidiaries and closely-related companies, the largest of which is Pohjola. This announcement is distributed by Thomson Reuters on behalf of Thomson Reuters clients. The owner of this announcement warrants that: (i) the releases contained herein are protected by copyright and other applicable laws; and (ii) they are solely responsible for the content, accuracy and originality of the information contained therein. Source: Pohjola Pankki Oyj via Thomson Reuters ONE [HUG#1673478]


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