Eurozone equities are still the ticket: strategists

Eurozone equities have enjoyed a prolonged rally but the party isn’t over yet – at least in the opinion of strategists at Austria’s Raiffeisen bank.

Central banks still pumping plenty of liquidity at a global level, the decline in risk sentiment and slow but steady progress towards economic stabilisation in the West are ingredients for an increased appetite for investment, the strategists said in their monthly asset allocation report.

The markets are expecting “some tangible measures” to ease monetary policy to come out of the ECB’s June 5 meeting, which should be one factor supporting eurozone equities.

The strategists note that yields on government bonds are near historical lows, with 10-year German Bunds at 1.38% and US Treasuries at 2.5%.

“This is another argument for overweighting the equity markets, as we see little remaining upside potential for government bonds at the current price levels and thus expect a countermove later in the year,” they said.

eurozone equities upgraded

Raiffeisen strateigsts’ positioning

Another factor that could boost equity markets further, especially in the eurozone, is the fact that the presidential elections in Ukraine went relatively smoothly and the risks of Western sanctions against Russia “have declined significantly.”

“One should note, however, that this crisis has simply moved to the back burner now,” the strategists, Stefan Memmer and Manuel Schuster, warned.

A pleasant surprise from China in the form of the unexpectedly strong rise in the flash estimate for manufacturing PMI should also support stock markets.

The Raiffeisen strategists are overweight equities by 3% versus bonds.


They prefer eurozone equities, as well as emerging market stocks. Another factor supporting eurozone equities is the need to catch up relative to the US, while valuations “look broadly fair.”

They also cite a “sustained improvement in the peripheral crisis countries” that points to positive economic development despite the uneven pace of economic recovery among the big economies such as Germany and France.

On the emerging markets front, they believe the “exaggerated worries” about China’s real estate sector, its financial markets and its economy “have caused prices to fall too much.”

“Consequently, we expect to see a relative consolidation for Chinese stocks,” the analysts said.

In Central and Eastern Europe, they are overweight Czech and Romanian equities. Czech stocks are attractive because of the country’s strong economic growth and stable currency.

In Romania, reforms are moving ahead and “the low interest rates are also an advantage.”

To finance their overweight positions in eurozone equities and emerging markets stocks, they are underweight UK assets.

Not all bonds are bad, however. The strategists are overweight emerging markets’ government bonds, financing this position by underweighting US Treasuries, as they believe there is increased risk appetite among investors and the carry trade bets are still attractive.

In the eurozone, they are overweight Spanish and Italian bonds, a position financed by underweighting French and German bonds.

In emerging markets bonds, they are overweight the Czech Republic and underweight Hungary.