3 June 2011: Very much pessimism already priced in – slight overweight in equities, corporate bonds and commodities

The debts crisis in Europe continues to prevent a more favourable mood on financial markets. But because the anticipated economic development remains robust, no fundamental change in the assessment of the market is necessary…..

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            The most important indicators let us expect an economic development for the coming six months which is not, it is true, strong, but should be sufficiently powerful to keep markets in a reasonably “good mood”. Fundamental and still unresolved problems, such as the European debts crisis, the all in all unsatisfactory capitalisation of European banks or the financial difficulties of many pension systems will therefore not (yet) put a burden on the markets. For the time being, it is important that heavily indebted countries, such as Greece, Portugal and Ireland, should receive sufficient help in order to support their economic situation and thus also spare the European banking system from greater set-backs. We are assuming that this support will also be given. Effective measures, such as, for example, cuts in debts, will only become possible when the currently weakened national economies and the whole banking system are in a better state again. However, Europe’s economically more successful core and northern countries must continue, not only to help out the heavily indebted countries on the periphery, but also to insist on fundamental reforms in their economic systems.

            Persistent US growth

            We regard the state of the US economy as being robust. Real interest rates are still very low and are having a stimulating effect. In addition, the so important recovery in the labour market should continue. According to our forecast model, the chances of an increase in growth after a temporary phase of weakness are good. The same is true for the European economy, but not for Switzerland. The latter’s growth should probably weaken owing to the strong currency.

            As we classify the CHF as very expensive, we hold an underweight in it and in the JPY in favour of the commodities currencies AUD and NOK. According to our calculations, the USD is greatly undervalued, even if a further fall below the fair value is quite possible. In view of the debt problems in the European Currency Union, we prefer investments in secondary currencies, such as the SEK, to those in the EUR.

            With regard to the interest situation, we are not convinced that the last interest step in Europe has been the final one within the foreseeable future. In the case of bonds, we are generally keeping the duration neutral. We continue to prefer corporate bonds to government bonds as we assess the risks of failure as being very low. We have overweighted commodities as well as equities.

            The prices on European stock markets continue to be strikingly below the values calculated by us as being fair. Many investors’ exaggerated pessimism towards the debts crisis is expressed here. Within equities, we assess the energy, investment goods and retail food trade branches positively. The same is true for securities which will profit from redemptions of shares and increases in dividends.

            Source: ETFWorld – Swisscanto (Thomas Härter – Head of Investment Strategy)

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