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Equities to benefit in 2011

1 February 2011, Juliette & Victor

When we asked them in June 2010, the economists of private banks recommended that we should no longer be afraid of shares and return to the markets. This is an argument which has not changed today.

Written by Frédéric Lejoint

Last June, economists excluded the assumption in which the developed economies would plunge back into a deep recession, and were optimistic on prospects for the second half of the year. These forecasts proved realistic, with a growth nevertheless faster than anticipated in the countries of the "European heart", particularly thanks to Germany. With regard to the Greek crisis, they estimated that leaving the euro would be an improbable outcome given the financial cost. In spite of major tensions of these past few months, no country has therefore seriously envisaged having the euro exposed. Strategists also estimated that we are going to have a rise in the compulsory rates on summer borrowings and this prediction became true from the third quarter.

That allowed shares to achieve a better performance. The majority of European stock exchange indices have therefore taken between 10 and 15% since the start of July 2010, and on the American stock exchanges, gains have been even greater.

Often Right

We went to ask them again about their expectations for 2011. All of them reported that the level of uncertainty is now much smaller. The growth predictions were generally at 2 to 3% for developed countries, and at 6 to 9% for emerging countries. "Reading the economic context is a lot less clear today," confirms Thierry Masset (ING Private Banking). On a European level, growth will remain at two speeds. "The core would still be able to attract progressively an acceleration within a country like Spain, given the economic weight of central countries," underlines Peter Ampe (Société Générale Private Banking). Expectations for the United States remain disparate, between a pursuit of acceleration and a stabilisation due to the release from indebtedness of the public sector and households. Nevertheless, every one of the central banks of developed countries would not raise their indicative interest rates here until the end of the year.

On the other hand, the emerging countries could be a bit disappointing, even if nobody envisages a catastrophic scenario, with a Chinese inflation which would attract increases in rates and a significant slowing down of the main economic engine in the world. "We are not anxious. The Chinese authorities have taken measures aimed at avoiding overheating in certain areas of demand, while maintaining high economic activity," indicates Matthieu Grouès (Lazard Frères Gestion). "We do not think that the global economy is going to plunge back into recession, but inflationary pressures make us more vigilant," confirms Patrick Vandenhaute (Dexia Banque), which, in any case, advocates maintaining careful vigilance on these economies." The financial crisis has accelerated a move of the centre of economic gravity towards the emerging countries," reports Marc Moles le Bailly (Private Bank Edmond de Rothschild Europe). "It is these regions in particular which have permitted global growth to keep afloat over the last two years, and China remains an economic engine in the medium term." Japan is also quoted on many occasions as being a market to watch for 2011, particularly if the emerging growth is sustained more and more by that of the private consumption in these countries. "The Japanese industrial fabric is, in fact, made up of numerous groups working in these sectors, and the yen will be able to fall back down in 2011 and make Japanese exporters more competitive," emphasises Peter Ampe (Société Générale Private Banking).

Obligation of the state: to avoid

On the obligatory level, the long term rates would have to be redressed, which will lower the market. "It is too early to come back to obligations of state," confirms Peter Ampe (Société Générale Private Banking). "Rates will have to return to 1% before these instruments become interesting to investors again." "We clearly prefer to be positioned on the obligations of companies on durations of 3 to 5 years," indicates Frank Vranken (BNP Paribas Fortis Private Bank). "Moreover, we have a preference for securities that are a bit more risky (of a rating less than BBB-) because the return on them is significantly higher for a much greater risk. Now, under current economic conditions, the risk of insolvency has greatly diminished." Victor Zwart (Wealtheon) recommends using interest rate trackers. "In the past, an increase in the obligatory rates was necessarily a bad thing. There are now products that can be negotiated day by day which allow you to profit from these movements." At Dexia, Patrick Vandenhaute estimates that it is necessary rather to be diversified on obligations for countries which might enter the euro. "It is clearly the topic that we prefer on the obligatory markets at the moment. Nevertheless, we are not negative about the obligations of business, but the potential there is less".

Shares: are positioning

Every analyst now recommends preferring share markets, which will have to benefit from a better dynamism of growth. "We remain very positive on the Stock Exchanges, and in particular the euro zone," emphasises Matthieu Grouès (Lazard Frères Gestion). "The rates have suffered a lot since the crisis, which does not seem justified to us. We anticipate a very good performance in 2011, with a potential of around 15% in Europe. If the climate calms down to the level of Europe as a whole, great capitalisations will have to be benefitted, and conversely, small capitalisations will achieve a better performance if the situation remains troubled." Marc Moles le Bailly (Banque Privée Edmond de Rothschild) is particularly optimistic on the "major exporting multinational businesses, which will benefit from globalisation. We are slightly overweight on the share markets, and on the geographical level, we are equally exposed to Europe, the United States, and the emerging countries (through funds)". Victor Zwart (Wealtheon) sharing this advice: "It is necessary to position yourself on businesses which work globally, such as large industrial values or technological values. And we remain negative on the financial values, which will have to continue to subject the negative influence of the financial crisis." Shares which propose increased dividends also save its supporters. "With a gross return of 4.5% on shares of EuroSTOXX50, we continue to like this topic, as according to us it is now or never to play this strategy," indicates Frank Vranken (BNP Paribas Fortis Private Bank). "The ideal will be to combine the growth of activity and increased return. We have seen well last year that the sole dividend would not allow the investor to come onto a sector," emphasises Peter Ampe (Société Générale Private Banking).

Bad time for gold In the short term, the stock exchange markets would be volatile. "The fundamentals are good, it is at the level of economic growth that results are expected. Nevertheless, the current situation is still dominated by problems in Europe as a whole, which could still cause nervousness over the first half of the year," emphasises Thierry Masset (ING Private Banking). "For our part, we remain convinced of the topic of emerging markets for the long term. But in the short term, there is the risk of having several measures increasing rates in China, and we prefer to wait for the end of this movement before increasing our exposure to these markets," emphasises Frank Vranken (BNP Paribas Fortis Private Bank). The strategists are also less optimistic about gold. "The greatest part of the path has been achieved, the trend risks being more neutral in the future, even if by way of diversification, we think that this asset can still have its place in a portfolio," emphasises Thierry Masset (ING Private Banking). There is a similar warning bell from Frank Vranken (BNP Paribas Fortis Private Bank) who emphasises that the lowering of uncertainty factors on the financial markets is not a positive sign for gold, which people tend to turn to in troubled times. "It is too late still to be frankly enthusiastic."

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