Bankinter expects 3Q vertigo in sound cycle

It is still early to include this element in investment strategy. Global jobs recovery gains track and intervention and financing rates will remain very low for a long time, more than commonly assumed. Estimates on timing are more and more complex but without inflation signs BoE and/or Fed aren’t likely to take steps before late 2015.

Market is seldom as confused and affected by few crucial problems as now. Last two years’ advances (in 2012 summer Spanish 10-year bond yield was over 7%, for instance) disorient investors and make key factors seem finished. Even geostrategic risks (Ukraine, Iraq) have lost influence in a market that willingly comes to terms with whatever. Major risks involve probable rate rises in the UK and the US, perhaps in that order, and hypothetical deflation in the EZ. Rates will eventually go up and discussion goes about the timing. However deflation is not bound to take place.

ECB significantly reduced this risk in June. The market assumes both BoE and Fed will start to rise rate in 1Q15, after the tapering is done in October, but Bankinter sees a high probability of a slower pace. The risk of mistake of the central bank taking the first step is be huge, as it could spoil the recovery of the economy it is accountable for. Therefore, motives can’t be just preventive but sound and reactive to correct a clear, serious risk. Today inflation concerns lack enough importance in the UK (+1.5%) and the US (2.1%) to prompt a change of path, at least provided employment doesn’t improve and there are no wages tensions. In the meantime EZ gets concerned about deflation but analysts questions the materializing chances.

Where does Bankinter move its opinion and what is its forecast for the upcoming months? GDP prospects for EMU, the UK, India and, slightly, China are upgraded whereas the USA gets it downgraded due to cold snap in December/January although remains the main power. Brazil increasingly rise concerns and is also downgraded. The only positive exemptions in the emerging economies are Mexico and India. Long term rates (10-year bond as reference) will boost in Germany and the USA less than expected by analysts and will drop more than foreseen for European periphery. Spanish 10-year bond could cut down yield to 2.20% in 2015 vs. 2.70% at previous estimate. The main problem in current bond prices is possible future inflation, seemingly omitted. Financing will have be more reachable at lower costs thanks to ECB action. All this issues will foster economic growth, encourage profits and rise companies’ values.

In this context, stock markets will move forward less aggresively, but will keep stable in medium term view. Potentials will be attractive, up to 50%! Industry, oil, utilities and European banks are the sectors analysts are betting for. Most importantly, they recommend to work on identifying concrete names rather than acting in line with generic recommendations (sectors, countries…). The context has become more demanding.

As for currencies, the yen depreciation might me slower but Bankinter finds a 140/150 range reasonable whereas the euro could gradually go back to 1.30/1.35.

About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.

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