CURRENT
POLL

Equity markets 2018

Will the equity markets remain friendly in the upcoming year?

73.33%
Y
26.67%
N
http://blog.en.erste-am.com/wp-content/uploads/sites/13/2017/10/iStock-KunststückXXL-890x390.jpg

An impressive stunt

(c) iStock

The Council of the European Central Bank pulled an impressive stunt at the monetary policy meeting on 26 October. ECB President Mario Draghi announced to reduce the extremely supportive monetary policy in the near future while sounding very cautious (dovish) with regard to the process at the same time.

In response, the euro depreciated against the US dollar, share prices increased, and the yields of German government bonds and spreads for country default risk were down.

Reduction of the bond purchase programme

The most important measure is the reduction of the bond purchase programme. Until the end of 2017, the monthly volume will remain at EUR 60bn. From January 2018 onwards, it will be halved to EUR 30bn and is to run at least until September 2018.

Optimism about economic development

The backdrop for this measure is the growing optimism of the ECB about a gradual increase in inflation towards the central bank target of slightly below 2% in the medium run. Three reasons were cited: 1) economic growth in the Eurozone is robust and broadly based; 2) core inflation has already edged slightly higher (1.1% p.a. in September); and 3) the monetary policy is effective by keeping credit interest rates low.

Cautious course of action

However, economic growth is still not self-supporting, and inflation pressure is low. Therefore, a high degree of monetary support remains necessary.

Ongoing monetary support

The forward guidance, i.e. the guidance of the market participants’ expectations, is an important tool used by the central bank. In the press statement, three rules seem to apply: 1) supportive level, 2) only gradual reduction, 3) no abrupt termination.

The balance sheet of the ECB has already grown to EUR 4,400bn. In September 2014, it was still at EUR 2,000. The volume of liquidity that the ECB provides to the system is therefore massive.

The bond purchase programme will be extended until September 2018, albeit in a reduced form. If necessary, it will be extended again or even expanded. The expiring bonds will be reinvested also after the end of the bond purchase programme for as long as necessary.

The key-lending rates will remain on the currently very low level after the bond purchase programme has come to an end. This puts paid to any expectations of higher key-lending rates in 2018. An initial increase in key-lending rates is now more likely to happen at the end of 2019.

Conclusion

Economic growth in the Eurozone is strong and broadly based, but not self-supporting. At the same time, inflation is too low. This requires a moderate reduction of the very expansive monetary policy. In the short run, this environment is positive for risky asset classes such as equities. Even for credit-safe bonds such as German government bonds, the environment is not particularly disadvantageous. The risk premium for holding bonds with long as opposed to short maturities (term premium) could increase as a result of the expiry of the bond purchase programme, but the outlook for sustainably (very) low key-lending rates is supported by the variables of the scenario in place.

Unfortunately – and paradoxically – the susceptibility to (or risk of) price slumps is higher:

  1. An overheating economy could cause inflation to record an unexpectedly substantial increase. This would force the ECB to not only take the foot off the gas but in fact to hit the brakes.
  2. The TINA investment approach (“There Is No Alternative”) for risky asset classes could cause the financial market to overreach.

 

Legal note:

Prognoses are no reliable indicator for future performance.

Did you like this article?

0.00 Average Rating (0% Result) - 0 Votes
Legal disclaimer

This document is an advertisement. All data is sourced from ERSTE-SPARINVEST Kapitalanlagegesellschaft m.b.H., Erste Asset Management GmbH and ERSTE Immobilien Kapitalanlagegesellschaft m.b.H. unless indicated otherwise. Our languages of communication are German and English.

The prospectus for UCITS (including any amendments) is published in Amtsblatt zur Wiener Zeitung in accordance with the provisions of the InvFG 2011 in the currently amended version. The simplified prospectus is prepared by ERSTE Immobilien Kapitalanlagegesellschaft m.b.H. and published in Amtsblatt zur Wiener Zeitung in accordance with the provisions of the ImmoInvFG 2003 as amended. Information for Investors pursuant to § 21 AIFMG is prepared for the alternative investment funds (AIF) administered by ERSTE-SPARINVEST Kapitalanlagegesellschaft m.b.H., Erste Asset Management GmbH and for ERSTE Immobilien Kapitalanlagegesellschaft m.b.H. pursuant to the provisions of the AIFMG in connection with the InvFG 2011.

The fund prospectus, Information for Investors pursuant to § 21 AIFMG, the simplified prospectus, and the key investor document/KID can be viewed in their latest versions at the web site www.erste-am.com or www.ersteimmobilien.at or obtained in their latest versions free of charge from the domicile of the management company and the domicile of the custodian bank. The exact date of the most recent publication of the fund prospectus or simplified prospectus, the languages in which the key investor document/KID is available, and any additional locations where the documents can be obtained can be viewed on the web site www.erste-am.com or www.ersteimmobilien.at.

This document serves as additional information for our investors and is based on the knowledge of the staff responsible for preparing it at the time of preparation. Our analyses and conclusions are general in nature and do not take into account the individual needs of our investors in terms of earnings, taxation and risk appetite. Past performance is not a reliable indicator of the future performance of a fund.

Gerhard Winzer

Gerhard Winzer has worked at Erste Asset Management since March 2008. Up until March 2009, he was Senior Fund Manager in Fixed Income Asset Allocation; he has been Head Economist since April 2009.

He holds a degree from a polytechnical college and studied economics and business at Vienna ...

More

Add a comment

Subscribe to Blog by E-Mail