Eurozone equities tipped to outperform the US despite debt crisis

News - Banking

Written by Ray Clancy

Friday, 19 November 2010 09:14

Japanese and euro zone equities will outpace the US market in 2011 with Germany a strong performer benefiting from cheap euro zone money, according to strategists.

Swiss private bank Julius Baer, which has €190 billion of customer funds, predicts that Japan’s Nikkei will be up 13.2% by October 2011, from a year earlier, and the Eurostoxx 50 up by 12.5%.

‘Assuming a moderate macroeconomic expansion, without a slip into a new recession (double dip), the share strategy specialists of Julius Baer foresee an average growth of share returns of about 15 percent,’ Baer said.

This trend is supported by attractive emerging markets, higher profit margins, and continued low refinancing costs, even if risk premiums are above the long-term average, it said.

Baer gave numeric forecasts for six leading equity markets, with gains led by Japan, the euro zone, including Germany’s DAX 30 up 12.2%, Britain’s FTSE 100 up 11.8% and Switzerland'’ SMI up 11%. The US S&P 500 was seen up 9.8% over the year to October 2011, the private bank added.

In Europe, Baer also made specific comments about Germany and Italy, which a Baer official said were its ‘two domestic markets’ outside Switzerland.

‘Very relaxed monetary policy should continue to help the German equity market. The debt crisis is weighing on the Italian equity market,’ said Baer head of research Christian Gattiker.
The euro zone debt crisis and Italy’s higher bond yields meant Italian companies, particularly banks, pay higher refinancing costs, Gattiker explained.

‘Italy is in the doldrums on the debt crisis. Italy has underperformed on this risk and the more expensive refinancing,’ he said referring to equities, adding he did not know if these costs would fall in 2011.

On the euro zone crisis and Ireland, Baer’s deputy chief economist David Kohl said there will be more of these crises in 2011. ‘But they will be rather short lived. Italy is doing quite well. In contrast to Spain and Greece, Italy has shown discipline on labour costs and remarkable discipline in fiscal policy,’ he added.

On other asset classes, Baer identified Russia, the Czech Republic, Poland, Belarus and Lithuania as ‘new safe havens’ for bonds. Gattiker said this choice was based on low risk of default.

On gold, he said it made sense to retain 5% of portfolios in gold even if gains will slow.

‘There might be further upside. It might see $1,500 per ounce. It is difficult to see two-three years acceleration. It is time to take profit,’ he said.

Read the Investment International Eurozone Crisis Report