Pohjola's analysts: Yielding returns in a slow growth environment
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
- 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.
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Source: Pohjola Pankki Oyj via Thomson Reuters ONE