OP-Pohjola analysts: A riptide of sluggish economic growth and monetary policy tightening

Macroeconomic conditions have proven to be more challenging than anticipated at the beginning of this year, but the US in particular has experienced a trend change for the better after a period of lower growth caused by exceptional weather conditions early in the year. The euro zone has clearly milder economic growth prospects than the US, and the recent geopolitical tensions and the economic sanctions placed against Russia have added to the risk of future growth disappointments. In the emerging markets, predictions for economic growth have been revised down relatively little and growth prospects diverge greatly.

- While the global economy has been getting healthier, the process has been slow, and economic policies have relied largely on monetary policy moves to fuel growth. Although monetary policies remain very expansionary on the global scale, the driving theme later this year and in 2015 will likely be their gradual normalisation. The tightening should begin first in the US (Q1 2015) and the UK (Q4 2014), but the ECB and Bank of Japan should maintain their extremely easy monetary policy stances through next spring, the analysts note.

- Among the asset classes, we continue to favour stocks and corporate bonds, and have an underweight position in government bond investments and the money market. The brighter economic sentiment in the US reinforces our view that risk appetites will remain strong and that the markets do not rely solely on monetary stimulus by central banks. We expect the robust performance of the US stock market to continue; in the euro zone we are favouring more defensive sectors and companies providing a high dividend yield. In the corporate bond market, we continue to favour high yield bonds over investment grade bonds, the analysts continue.

In the fixed income market, the attention is mainly on the gap between market pricing and the interest rate path signalled by the Fed. Money market rates are subject to minor downside pressure following the ECB's actions. The interest rate curve is no longer in line with the interest rate stance of OP-Pohjola's analysts as the US economic development is a threat to the long-term interest rates of the euro zone as well. The analysts' duration recommendation for euro zone interest rates is four years.

- The EUR-USD currency pair has reflected since this summer the differences in economic growth and monetary policy directions. With the ECB taking further expansionary measures, we see grounds for a continued downtrend in the ratio. Our target rate for the EUR-USD ratio over the next 12 months is 1.20, says Jukka Ruotinen, Head of Fixed Income and FX Research.

Corporate bond markets remain robust and even though risk premiums continue to head down, the analysts believe these markets still offer reasonably good yields in view of the general interest rate level.

- Among the Finnish companies, we see most value in the corporate bonds of Cargotec, Nokian Tyres, Outotec, PKC, Ramirent and Tieto, whereas the corporate bond yields of Elisa, Metso, Neste Oil and Nokia are the least attractive relative to their credit ratings, Ruotinen adds.

In the European stock markets, OP-Pohjola's analysts favour sectors that have potential for further profitability improvement and valuations which have not risen unreasonably high. These include automobiles & parts, personal & household goods, banks and industrials. The analysts are more pessimistic about chemicals, real estate and retail.

- Among the Finnish shares, our favourites for the latter part of the year are Cargotec, Metsä Board, Nordea, Sampo and TeliaSonera. In contrast, we recommend avoiding the shares of Fortum, Nokia, Sanoma, UPM-Kymmene and Vacon, says Henri Parkkinen, Head of Equity Research.

For additional information, please contact:

Jukka Ruotinen, Head of Fixed Income and FX Research, tel. +358 10 252 2792
Henri Parkkinen, Head of Equity Research, tel. +358 10 252 4409