«Since May 2010, one debt summit has followed the other with the aim of resolving the debt crisis affecting an increasing number of countries within the eurozone. However, a clear solution to the problem has yet to be found, and this is reflected unequivocally by the global markets,» notes Peter Brezinschek, chief analyst at Raiffeisen Bank International AG (RBI). «Even though the EU summit held on December 8 and 9 managed, for the first time to propose correct approaches for achieving a lasting solution, this summit also revealed the basic dysfunctions within the European Union: Very slow implementation and a lack of unanimity among the heads of state. No wonder that rating agencies are crunching numbers and are downgrading the outlooks even for AAA countries. It is highly probable that downgraded ratings within the eurozone over the first half of 2012 will generate turbulence.» From Brezinschek’s prospective, the first quarter of 2012 will pose a serious test for the eurozone, which will see an acceleration of crisis management towards the constitutional reforms needed to achieve a fiscal union playing an important role. Brezinschek feels that the political development and the restructuring programme in Italy will play key roles in the future developments of the eurozone.
In light of these developments, Helge Rechberger, head of Stock Market Analysis at RBI, believes that stock markets, as well as significant portions of the corporate bond market, will be characterised by falling prices in the first months of 2012.
The turbulence within financial markets and political disputes within many countries and at the pan-European level are now affecting the real economy. The distinct reticence of companies with regard to new investments and the increasingly gloomy prospects for exports are the primary reasons behind modest forecasts for the next six months. Given the current economic framework conditions and the results of recent economic surveys, Brezinschek believes that a palpable recession can be anticipated from the end of 2011 to mid-2012. For the eurozone, the analysts at Raiffeisen Research anticipate a decrease in the GDP of −1.0 per cent for 2012, although private consumption should provide a support for the economy in those countries with robust job market data and relatively high wage increases. While Brezinschek forecasts GDP declines throughout the eurozone, the economies of the USA (GDP growth forecast for 2012:1.5 per cent) and the emerging markets (GDP growth forecast for 2012:5.7 per cent) are likely to face economic downturns, but not recessions.
According to the analysts at Raiffeisen Research, the annual inflation rate recently reached a cyclical high of 3 per cent per annum. Energy, food, transportation and housing were the primary inflationary drivers. On the basis of forecast oil prices just below 100 US dollars per barrel in 2012, the research experts anticipate that the rise in energy costs will quickly abate. Brezinschek states that «wages will not contribute towards inflation in most European countries, given the precarious situation in the job market.» In contrast, tax increases will likely lift the price level for the year as a whole. «Overall, inflation rates within the first months of 2012 will quickly fall towards 2 per cent and stay at this level for the rest of the year,» adds Brezinschek.
The decreasing inflationary prospects over the year are encouraging central banks throughout the world to continue their expansive monetary policy through 2012. «We expect sustained negative real interest rates in the eurozone and USA,» explains Brezinschek who also would not completely rule out additional reductions in the interest rate by the European Central Bank, even if these are not likely. In Brezinschek’s opinion, the US Federal Reserve remains in a holding position due to the good economic data, but will probably decide to implement additional measures in the first half of 2012 due to the expected cooling of the economy.
«Liquidity support, which is being offered on a basis of up to three years, could have a positive effect on the capital markets and will allow short-term bond yields to decline,» states Brezinschek. Nevertheless, he expects significant differences in bond yields to continue due to the lacking implementation of restructuring measures.
The analysts at Raiffeisen Research feel that there is medium and long-term downward potential for returns on German bonds, since the high liquidity in the banking system will probably seek out a home in secure investments. In contrast, US government bonds will probably still be considered a «safe haven» in 2012 despite the looming likelihood of the country’s AAA rating being downgraded by another rating agency besides S&P. These bonds could correspondingly profit in the first quarter from another sharpening of the debt crisis and a recession in the eurozone. As soon as the eurozone begins to stabilise, the yields of government bonds with 10 year maturities will once again rise to a level significantly above 2 per cent.
The analysts at Raiffeisen Research expect that the liquidity injected by the central banks will for now not be enough to prevent the stock markets and major segments of the corporate bond market from being characterized by declines in the first months of 2012.
In their opinion, the public debt crisis will continue to be the principal issue for the eurozone’s stock markets in the coming months. «The related problems have yet to be solved. As long as the politicians don’t intervene decisively, it is more than questionable whether the stock markets can post sustainable recoveries,» explains Rechberger. In addition, given the significant weakening of the global economy, companies will necessarily experience a decrease in profits. «Due to these factors, there will be little manoeuvring room to generate a turnaround in the stock markets within the eurozone. For that reason, renewed share price declines appear realistic.»
In the case of US stocks, the Raiffeisen experts are forecasting more clouds than sunshine and are therefore advising to sell. «It is true that the stock exchanges have taken some steps to adjust to a difficult environment, and that the existing liquidity is also flowing into the stock markets; however, we are expecting further share price declines, in particular during the first quarter of 2012.»
«The spreads are currently at dizzying levels and corporate profit estimates for the next 12 months are still not yet in line with the economic outlook,» notes Rechberger. He expects that the market’s readiness to assume risk will consequently not increase for the time being. In addition, negative reports regarding the economy and regarding the creditworthiness of state bonds will weigh on price levels. Rechberger expects that in the area of corporate bonds the high-yield segment will suffer more than good-quality bonds. «If fiscal budgets should be cleaned up at a faster pace, then the mood will brighten over the course of 2012, boosting stock prices along with the positive economic indicators,» Rechberger states.
Since the stock market is characterised by caution due to worries about economic downturns, the experts at Raiffeisen Research have assumed a strong position in the bond segment. «The risk premiums for those countries whose creditworthiness is not of the very highest ranking have decreased significantly recently. However, given the economic downturn and the repeated reassertion of the sovereign debt issue in Europe, risk premiums could once again begin to rise steeply,» explains Brezinschek. «High quality bonds now yield only low returns, but they should prove to be a good investment in the event of a new intensification of the European sovereign debt crisis and the global efforts of central banks to breathe life into the economy. Our portfolio comprises 40 per cent stocks, 5 per cent real estate and 55 per cent bonds with a significant investment in the money market.»
Raiffeisen Bank International AG (RBI) regards both Austria, where it is a leading corporate and investment bank, and Central and Eastern Europe (CEE) as its home market. In CEE, RBI operates an extensive network of subsidiary banks, leasing companies and a range of other specialised financial service providers in 17 markets.
RBI is the only Austrian bank with a presence in both the world’s financial centres and in Asia, the group’s further geographical area of focus.
In total, around 60,000 employees service about 13.7 million customers through around 2,900 business outlets, the great majority of which are located in CEE.
RBI is a fully-consolidated subsidiary of Raiffeisen Zentralbank Osterreich AG (RZB). RZB indirectly owns around 78.5 per cent of the common stock, the remainder is in free float. RBI’s shares are listed on the Vienna Stock Exchange. RZB is the central institution of the Austrian Raiffeisen Banking Group, the country’s largest banking group, and serves as the head office of the entire RZB Group, including RBI.