Lower interest rates increase yield pressure on investors
ERSTE-SPARINVEST sees interest grow in corporate bonds and equity funds

Investors across the globe are trapped between the sovereign debt problem and their desire to hunt for yields. At present the financial markets are predominantly influenced by austerity programmes, spending cuts, tax increases and downgrades from ratings agencies. The newsflow is leading to increased volatility on the capital markets and offering investors and institutional investors attractive entry opportunities.

Looking ahead to the coming year, ERSTE-SPARINVEST sees encouraging signs of a turnaround in investor risk appetite in 2012. The low interest rates on the money market and for government bonds with first-class credit ratings are prompting investors to be on the look-out for attractive investment opportunities", explained ERSTE-SPARINVEST CEO Heinz Bednar. Investment funds are particularly suited given the way they are set up (secure, transparent). The traditional credit rating scenario of "states are better than companies" no longer applies as it used to: businesses can occasionally offer much more stable earnings perspectives than some states whose credit rating is under scrutiny." This is why Bednar perceives a fundamental change of paradigm in the investment strategies of private and institutional fund investors.

 

Core statements on outlook for 2012:

  • Encouraging signals of a trend reversal in investor risk appetite
  • Consolidation pressure leading to weaker economic growth
  • "Private vs. Public": equities and corporate bonds boosted by robust corporate earnings

E conomic growth slowing – interest rates still low
In developed economies, the need to consolidate public finances and bank balance sheets as well as the low utilisation of existing funds is keeping economic growth below average (2012: 1.0%). The anticipated hikes in taxes and prices coupled with loose central bank policies will counter the deflationary risks and ensure inflation stays subdued. According to chief economist at ERSTE-SPARINVEST Gerhard Winzer, the eurozone is set to contract slightly in the first half-year as the USA maintains its moderate pace of growth.

The emerging markets continue to grow more powerfully than developed market economies (2012: 4.8%), but not quite as fast as in previous years. The "hard" landing forecast for China could be averted, while risks in certain emerging markets have risen. This is clear given the elevated inflation rates in India and Turkey for example. Some countries in Central and Eastern Europe, particularly Hungary, are struggling with high external debt.

According to Winzer, the underlying problem is that sovereign debts are growing faster than the economies themselves. "This means that the loss of confidence with regard to the sustainability of sovereign debt trends and the liquidity bottlenecks in the banking sector are all factors restraining the recovery of the global economy", emphasised the economist.

 

Winzer does not believe that the eurozone has the right conditions for a functioning currency area. This would require a fiscal and transfer union with federal bonds, a common economic policy and a "lender of last resort" (for banks and governments). There is a "bitter need" for a coordinated economic policy to counter the pro-cyclical fiscal policy and combat the imbalances within the eurozone. Monetary policies will remain very loose given the weak economic growth, the tight fiscal policy, the weak financial sector and the structural reforms. This means key interest rates of around zero, larger central-bank balance sheets, injections of liquidity for banks and governments and transparent communication. Conventional monetary policy is still working fine in the emerging markets. Consequently, we can expect to see modest cuts in interest rates in some countries given the downturn in economic activity.

Outlook for equity and bond funds in 2012: private vs. public
The debt problem in the developed market economies will keep the markets on tenterhooks in 2012 as well. This will fuel strong demand for government bonds with top credit ratings (such as German Bunds and US Treasuries), even though yields are lingering at all-time lows and the instruments are barely generating any return: "The pressure is mounting on investors to reach their investment objectives", stressed Harald Egger, Head of the Investment Division at ERSTE-SPARINVEST. He assumes that risk appetite will grow, a trend that will quicken and be all the more sustainable the "milder" the anticipated recession in Europe turns out to be. Companies seem to be largely indifferent to the high sovereign debt levels, even despite the signs on the horizon of weakening economic activity in Europe. Egger: "Companies are in very rude health at present and generating solid earnings".

This is why ERSTE-SPARINVEST's portfolios are increasingly concentrating on funds that focus on corporate bonds, which includes interesting candidates from both the investment-grade segment (up to a BBB rating) and the high-yield sector. Egger also reckons there are good opportunities for government bonds in emerging markets, which despite the problems in Europe and in the USA are currently experiencing sustained growth and are benefiting from steady improvements in their ratings. What is more, the currencies of these countries are likely to appreciate against the euro and the US dollar on account of the liquidity created by central banks in the eurozone and in the USA.


 

Since the end of the previous year we have also witnessed growth on the stock exchanges. Even if growth in the USA comes in at a moderate rate of around 2% in 2012, the USA has provided a better outlook than Europe. This is why the equity fund portfolios of ERSTE-SPARINVEST are overweighted with equities from North America, European stocks are neutral, and Japanese equities are underweighted – in comparison to MSCI World. Opportunities that look particularly promising in the emerging markets include Russian and Brazilian stocks, while looking at sectors, ERSTE-SPARINVEST favours materials, energy and health care. Technology and consumer stocks could also make a comeback. And last but not least, the massive growth in central bank balance sheets suggests a continued rise in the price of gold, believes Egger.

Current fund recommendations from ERSTE-SPARINVEST
Businesses are ready for some tough times. They are making profits, have built up cash reserves and costs are under control. Thus now is a good time to move into corporate bonds. The ESPA CORPORATE PLUS BASKET 2017, currently available for subscription, has a fixed term of five years and invests in a broad portfolio of approximately 50 corporate bonds in the investment-grade (minimum rating of BBB (Standard & Poor’s) or higher) and high-yield segments (fixed-interest securities with ratings of BB+ or lower). The foreign currency risk is always hedged. The minimum annual distribution set as of the launch date for the fund (1 March 2012) is currently 4.25%* (based on the initial net asset value before tax). The fund has a risk buffer: each year up to roughly 0.5%* of the issuers could default (2.5% over the entire term) and the net asset value will remain no less than EUR 100 per share certificate.

* Calculated based on the sample portfolio before costs as of 7 December 2012. The exact figures can only be determined when the fund is launched on 1 March 2012 as they depend on prevailing market conditions.

ESPA BOND RISING MARKETS (AT0000A0NUF0)
The ESPA BOND RISING MARKETS is an actively managed bond fund based on the Erste Group Rising Markets Bond Index, an index for growth regions. The fund primarily invests in government bonds and the bonds of quasi-state-owned companies in the selected growth markets. Alongside economic and population growth, the Rising Markets Index also applies minimum criteria with regard to living standards and fighting corruption. This results in a mix of no more than 25 countries which display above-average growth potential by international standards and can therefore be classified as extremely promising.

ESPA VINIS STOCK GLOBAL (AT0000858428)
The largest, actively managed sustainability equity fund in Austria, the ESPA VINIS STOCK GLOBAL, is geared towards the MSCI World global stock index. Potential equities are selected in a four-stage sustainable investment process. The fund's investment universe is filtered based on environmental, stakeholder and corporate governance criteria, with the final decisions on stock selection being made by an advisory board.

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Enquiries: ERSTE-SPARINVEST, Press and Public Relations
A-1010 Vienna, Habsburgergasse 1A, fax: 0043 (0) 50 100 ext. 17102
Dieter Kerschbaum, Tel. 050 100 ext. 19858,
e-mail: dieter.kerschbaum@sparinvest.com
Paul Severin, Tel. 050 100 ext. 19882,
e-mail: paul.severin@sparinvest.com

 


This is an advertisement. Unless specified otherwise, data source: ERSTE-SPARINVEST Kapitalanlagegesellschaft m.b.H. Our languages of communication are German and English. The latest versions of the Full Prospectus, Simplified Prospectus or Key Investor Document (and any changes thereto) have been published in the “Amtsblatt der Wiener Zeitung”, in accordance with the provisions of the Investmentfondsgesetz 2011 (Austrian Investment Funds Act). Copies are available free of charge to interested parties at the registered offices of ERSTE-SPARINVEST Kapitalanlagegesellschaft m.b.H. and the depositary bank. The most recent publication date, information about language versions of the Simplified Prospectus or - if applicable of the Key Investor Document - and details of any other collection offices are published on the website www.sparinvest.com. This document serves to provide additional information to our investors and reflects the knowledge of its authors at the time of going to press. Our analyses and conclusions are of a general nature and do not take into account the personal needs of our investors in terms of income, fiscal situation or attitude to risk. This is not a personal recommendation. It should be noted that past performance is not a reliable indicator of the future performance of a fund.