Consequently, a so-called great rotation out of bonds into stocks will not take place. Instead, equity investors will continue to focus on high-dividend stocks from the consumer staples, healthcare and insurance sectors. Demand for defensive currencies will also pick up. The Swiss franc and Japanese yen are likely to appreciate once risk appetite in financial markets eases, according to Sarasin Global View released on Wednesday.
Bank Sarasin expects growth will continue to pick up in the second quarter 2013. The US economy is still profiting from a real estate revival. This boosts household wealth and stimulates growth in consumption. Both consumption and investments will make a positive contribution to growth in the first half of 2013. China also profits from the growth stimulus provided by its new government. However, other far-reaching reforms will be necessary to negotiate the transition from an export-driven economy to a consumer-led model.
Euroland is also recovering, albeit at a low level. Nonetheless, the rising expectations for a powerful, long-term upswing are premature. Policies to induce the necessary fiscal consolidation will dampen global economic growth until the end of the year. The so-called «sequestration» will slow growth in the USA, which will also feed through to Euroland. Since no euro area member state can reduce its debt level without growth, euro worries are expected to resurface in the second half of the year.
“Again this year, we anticipate a dip in growth in the second half. The dampening effects on consumption, which are inevitable due to the necessary fiscal consolidation, are too great,” Jan Amrit Poser, Head of Research and Chief Economist at Bank Sarasin, said.
“Overall, we expect key equity indices at the end of the year to be lower than they were at the start of the year. We are convinced that it is possible to achieve a positive return in the second quarter with the right stock selection,” Philipp E. Baertschi, Chief Strategist at Bank Sarasin, said.
An array of positive factors led to a rise in US yields in the first quarter. In the second half of the year, US consumers will start to feel the drag of the adopted fiscal measures. The second quarter will be a period of transition: a rise in yields is expected at the beginning followed by a turnaround in the bond market towards the end of the quarter. Euroland won’t be able to escape the slowdown in the US economy in the second half of the year.
This will also be accompanied by a decline in German yields towards the end of the year. With deterioration in the economic situation, Swiss interest rates are also likely to trend lower again. On the other hand, the appeal of emerging markets remains consistent, despite the disenchantment in the first quarter.
As part of the Sarasin economic scenario, leading economic indicators are expected to peak in the coming months. Defensive currencies will be in demand again. The Swiss franc will rise towards its lower limit. The Swiss National Bank will not hesitate to undertake new foreign currency purchases if needed. The Japanese yen will also be tested.
It is likely to appreciate when risk appetite in financial markets subsides. Growth fears are also likely to benefit the US dollar because the greenback is negatively correlated with the stock markets. On the other hand, the euro runs the risk of currency losses because a weaker economy could reignite the debt crisis. Also, the cyclical currencies, the British pound, Swedish krona and the Aussie dollar, will struggle against economic headwinds. The Asian emerging market currencies will profit in the long term from the solid fundamental data of their respective countries.
Despite the resurgence of euro worries, the global equity markets managed to score big gains in the first quarter 2013.
This raises the question of whether the long-awaited «great rotation» will occur and whether the next bull market is just around the corner. Due to the economic tailwind, the low interest rate environment and the attendant high risk premiums, the equity markets are likely to stay on an uptrend for now. But once the fiscal policy headwind becomes predominant, disappointments will follow. The stock markets are expected to follow the same seasonal pattern as they did in the last three years.
The trend towards high-growth dividend-paying stocks should therefore continue. These stocks are mostly found in the consumer staples, healthcare and insurance sectors. Real estate stocks have already adjusted to the low interest rate environment and have the lowest upside potential, which explains why Bank Sarasin is underweight, this sector. Despite the weak performance in the first quarter 2013, Bank Sarasin believes emerging market equities offer the greatest potential. The news flow from China plays a very important role in this respect.
Two factors suggest the SMI rally was due to one-off effects. First, the weakening of the trade-weighted franc in recent months led to a rise in earnings expectations. The latter are very susceptible to movements in the Swiss franc because Swiss companies generate the lion’s share of their profits abroad. The second reason for the stronger performance of defensive markets was the hunt for yield. In addition to growth expectations, the global stock market rally in the first quarter 2013 was mostly driven by a decline in risk premiums.
These stocks are mostly found in the consumer staples, healthcare and insurance sectors. Since the SMI and the FTSE compared to the MSCI World have relatively high weightings in these sectors both indices directly profited from capital inflows.