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IPE special report May 2018

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Confident about Euroland equities

Bank Austria’s asset allocation can be broken down into three basic asset classes – namely equities, bonds and cash. We have a long-term, strategic allocation, which stands at 3% cash, 57% bonds and 40% equities. Our current allocation differs only slightly from this long-term view, in that it contains 41% equities, 57% bonds and 2% cash.
Against a backdrop of good economic growth worldwide, stocks should continue to show superior performamce. Bond yields suffered terribly in 1999, but have been much more constructive this year, and we expect this trend to continue for the time being.
In terms of sectors, while we recommend to never completely abandon technology stocks, we would like to point out that we also see value in traditional blue chips, and especially like financials and pharmaceuticals.
For the equity portion, our strategic asset allocation or benchmark is the FT World Index. Again, we have a current allocation, which differs from the long-term strategic position and places a significant overweight in Euroland equites. Relative to the 15% benchmark weighting, we have 24% allocated to Euroland equities. UK equities are somewhat underweight at 7%, versus 9.4% benchmark, and the rest of Europe (for us, mainly Switzerland and Sweden) is also slightly underweight, at 3% against 4.4% benchmark. In the US, we continue to have a moderately underweight exposure, at 48%, against a benchmark weighting of just under 52%. In Asia and the emerging markets, our exposure is roughly neutral. Japan stands at 12%, against a 12.5% benchmark weighting, and the emerging markets are at 6%, against just under 7% benchmark.
The reason behind this allocation is our continued confidence in European (ie Euroland) equity markets. In light of good earnings growth (about 17% for 2000, according to IBES consensus data) and ongoing merger activity, we see a constructive background for European stocks. Though interest rates are rising both in Europe and the US, bond yields have not really hurt equity performance, and the euro weakness has been helpful for European exporters. We are slightly less bullish on UK stocks, partly because of the more advanced economic cycle and partly because of a slower earnings growth outlook (14.7% for 2000).
In the US, we maintain our slightly underweight exposure. We expect US equities to keep posting good returns, with earnings growth to come in at 16.7% (IBES consensus). In terms of sectors, again we expect a period of increased volatility for technology, but would certainly not abandon it. The reason why we are slightly underweight in US equities and overweight in Euroland lies in the fact that we expect relatively better opportunities in Euroland.
We maintain our positive view on Asia. We are just about neutral on Japanese equities, and we have, infact this quarter, increased our exposure to the emerging markets, and to Asia in particular.
As for the bond portion of the portfolio, we have defined a synthetic benchmark, consisting of 50% JP Morgan Government Bond Index and of 50% Euroland Effas Bond Index. This decision was taken in light of the fact that all international bond indices have only about a 33% weighting in Euroland bonds, and it was felt that such an allocation would not contain enough euro-exposure for Austrian investors.
Our bond benchmark has just under 67% in Euroland bonds, whereas we have allocated a 74% exposure. In the UK, we are about neutrally weighted, at 3% against a benchmark weighting of 3.2%. Our bond portion in non-euro Europe comes in at 5.5%, against a benchmark weighting of 1.4%. Finally, our US dollar exposure stands at 17.5%, against a benchmark weighting of 15.7%. In explaining our strategy, relative to our first quarter allocation, we have reduced our exposure to non-euro Europe from previously 8 to 5.5%. This portion of the portfolio comprised bonds is in Danish kroner, Swedish kroner, Norwegian kroner and Greek drachma.
Monika Rosen is head of research in asset management at Bank Austria in Vienna

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