Jan.
23
2015

Let’s focus on European shares!

1. Japan, 2. Europe, 3. United States. This is the current ranking at the patinated asset management firm which is getting more interested in shares, Vontobel.

Deputy head of the group investment strategy of the firm with a client base of the world’s great and prestigious institutions and private investors, Alan Zlatar said in the interview that they do believe that there is going to be a stable European economic growth. In this respect, the Russian challenge is not becoming a disturbing factor, while low oil prices, the weak euro and the increasing consumption of the European people are all favourable factors. Investments seem to be starting up in the whole euro-zone.

All in all, Vontobel thinks that the European stock market prices are low and says it is better to buy these than American stocks, however it recons American bank shares to be a good investment as well; and especially the Japanese market. The yen is not weakening any further and buying gold will worth it only if its price goes below 900 dollars per ounce. The dollar is going to be the next stable reserve currency in the upcoming one and a half year, and the Swiss franc will not be able to withstand the pressure in the medium term, so the Swiss national bank will have to allow appreciation – according to Alan Zlatar.

Péter Zentai: How would my portfolio essentially look like if I had lots of money and I entrusted it to you?
Alan Zlatar: Shares would be dominant over government bonds. Earlier, our average portfolio consisted of a 50 percent shares and 50 percent government bonds ratio. Now, it is 55 percent shares and 45 percent bonds. In the equity ratio we strongly increased the proportion of Japanese stocks. We started their buying-in one and a half years ago; and it proved to be a remarkably good decision. Meanwhile – unlike in the past one and a half year – we do not bet on the weakening of the Yen against the dollar and the euro. We regard the downturn of yen as closed. Lately, we see great potential in European shares, the shares of euro-zone members and corporations. In the end, we have become interested in the shares of American banks as well.

What is the current ranking by regions?
Japan is in the first place. The euro-zone holds the second place, while the bronze medal is shared between Chine and the United States.
Is the era of government bonds over?
Last year, the only reason why it was possible to earn some profit from government bonds was that the markets did not believe in the possibility of global economic growth. This scepticism was emblematic for the developing world, and Europe was surrounded by pessimism. The results were declining of yields and rising bond prices. However, this set-up is going to be over soon. Market participants are starting to see the world and growth prospects more positively. Referring to the United States, this careful optimism is obvious, but its economy seems to be starting up, and sooner or later there will be an interest rate rise. By this, the American government bond will lose its attractiveness. Europe is a different issue in this regard, because the bond purchase programme of ECB is still in early stages, so European shares will not be any cheaper in the near future; it is still possible to earn some profit with them.

But more with European shares…?
We absolutely believe that. Even if with the easiest method; in the current macroeconomic and financial environment, comparing the European shares to last year’s or the current share and yield prices on the American market, the European stock market is not cheap but expensive.
However, if we calculate the P/E rates of the European shares with cyclically adjusted results (a method by Robert Shiller, American economist – Ed.), so if the current European prices and yields are analysed in a context of numerous market – financial cycles, we can find that the European market is cheap and attractive. This is why we purchase from it.

So far, the market has set the prices by that this area, the euro-zone, the European Union is unable to initiate a recovery cycle…
Indeed. However, in the meantime, the circumstances have changed in a favourable way. At Vontobel, we see a good chance for Europe to be able to start a stable economic growth from this year. The foundations of this are the following: the weakening of the euro and the confidence in that the euro will not get stronger in the following one – one and a half years. This is a major boost for European companies, a boost for the export to increase of global competitiveness.
The other foundation is the return of positive consumer behaviour to Europe. Indicating indexes are noticeably improving. The third reason for our careful optimism – however, it is barely taking shape – is that according to our beliefs, in the following 12-18 months numerous investments will be initiated on both pan-European governmental and corporate scales as well.
Oil prices are likely to aid the initiation of this recovery.
They are net contributions to its foundations. The fall of oil prices – against any other opposing assumptions – is not a sign of deflation, but simply an evidence of global oversupply. We do not believe arguments which state that the reason of dropping prices is the lack of economic growth. We do believe that the world produces too much crude oil, and the revolution of shale oil and gas extraction has a significant role in the resulting oversupply; furthermore, the return of Libya and Nigeria to the circle major extractors plays an important role as well.
All in all, we think that low oil prices especially help the economic recovery in Europe.

Won’t the Russian issues turn this tendency around?
Geopolitical problems and the Russian challenge are the most difficult to model. We believe that in Europe, the relationship between the West and Russia will not improve or deteriorate in the next one and a half year. We think that the conflict cannot be resolved. In fact, it would require a change of regime in Russia, but its foundation is non-existent. The market has calculated with it, and also with that the current situation cannot get much worse. Russia needs cash and we need natural gas. Gas transportation from Russia is continuing – in all circumstances. History has showed us. While the world was on the verge of a nuclear war, during the Cuban missile crisis (in the early 1961s – Ed.), the Russian gas transportation did not stop.

Taking all this into account, what can be expected from the gold, as a form of investment?
First of all, it must be viewed together with the predicted situation of the dollar, as a shelter currency. According to our predictions the dollar will remain strong in the next couple of years. Because the economic recovery of the United States is going to be greater compared to other regions, and sooner rather than later, the American National Bank will increase interest rates. Of course, the dollar’s rate of strengthening will decrease compared to the last months’. The point is, as long as the dollar can generate yield, the gold will not be able to do so. This is why we still keep gold as backup reserves, but do not increase its proportion in our portfolio. We will start purchasing once its price per ounce falls under 900 dollars; its extraction costs 880 dollars. Entering at this level is almost risk-free…

What is your opinion on your country’s money?
The Swiss franc is a special case. We suspect that the national bank will keep the 1.20 Swiss franc – 1 euro exchange rate for at least another one and a half year. We believe that the central bank will not loosen this bond. However, this – artificially keeping the franc weak – is an expensive game, because Switzerland is and will remain in a better situation than the European Union. Its current and potential growth is greater than euro-zone countries’; its rate of unemployment is much lower than in the countries of the European Union. The market will put greater pressure on its appreciation. We believe that the central bank will not endure this in the long-term and eventually it will let the market increase the exchange rate of the franc.