The summer has been characterized by the low and stable volatility of the major financial asset categories. The consolidation of equity markets registered through the summer weeks has been of the friendly kind that suggests continuation rather than reversal of market trends. The low volatility has encouraged a further, albeit modest, narrowing of high yield spreads. The under-performance of defensive stocks within all major markets has extended. And yet we have emphasized that the investment consensus has remained remarkably cautious, if not bearish. Accordingly, we are not surprised that September trading has begun with the break-out of pan-European equity indices that we have been waiting for: it could not have happened without the contribution of Europe’s financials, and of the banks in particular.
The year’s first half in Europe’s equity markets was dominated by the revival of the lower quality value stocks that are derivatives of the commodity-emerging space. The stabilization of real yields of US$ debt in this quarter signals the end of the phase of pronounced out-performance by these stocks: commodity values have entered their phase of consolidation. As a consequence, we have described how market leadership since mid-year in the European equity space has shifted from commodity-emerging value to global cyclical growth: Europe’s industrial cyclicals have registered quite dramatic out-performance over the last two months. However, there is another significant feature of this summer: the Banks are behaving better almost everywhere, including in the EZ. Although the return of expectations of higher US$ rates has been the necessary condition for the recovery of the Banks there are other contributory influences. Bank credit in Europe has extended its revival. The downward adjustment of earnings forecasts for the sector appears to be largely exhausted.
The performance of the Austrian equity market was mediocre in the last twelve months. The index is up c. 5% yoy in a rather volatile trading. Particularly export oriented and industrial companies performed very well, as key commodity prices rebounded after the sharp sell-off in late 2015/early 2016. We continue to have a preference for companies with non-cyclical business models, solid balance sheets and high, sustainable dividend yields.
Author:
Thomas Neuhold
Head of Austrian Equity Research
Kepler Cheuvreux
5 September 2016
Note
Wiener Börse AG would explicitly like to point out that the data and calculations given in this report are historic values, which do not permit any conclusions as regards future developments or value stability. Price fluctuations and loss of capital are possible in securities trading. The contribution is the personal opinion of the analyst and does not constitute a financial analysis or a recommendation for investment by the exchange operating company, Wiener Börse AG.