September was the third consecutive month in which the ATX Index was able to outperform the big benchmark indexes S&P and STOXX 600. While most international stock market indices suffered losses, the ATX managed to rally by nearly 4%. The main reason for this were the banks: German and Italian bank stocks fell, taking the Euro-STOXX banks index down with them; by contrast, Austrian bank stocks Raiffeisen Bank International and Erste Group were able to extend their upward trend, which has been underway since July. With that, the ATX Index finally exceeded the high for the year which had been in place since early January and in the process managed to crack the 2400 points barrier as well. What is going to happen next?
We continue to look toward the US with great interest. At the moment the upcoming presidential election has still very little impact on the stock market, but this may yet change. Our awareness of the potential effects of surprise votes has only recently been raised again in the wake of the Brexit referendum. Currently though, the main focus remains on speculation over the possibility of another Fed rate hike this year. Better than expected US macro data continue to put wind in the sails of the hawks. Markets currently indicate a more than 50% probability of another US rate hike, and as a result we can now also hear the first timid voices arguing in favor of an early reduction in the ECB's securities purchase program (i.e., so-called tapering).
Even if interest rate-related fears are not particularly pronounced yet, they do encourage sector rotation to some extent. The trend should increasingly shift toward cyclical stocks, away from defensive stocks (which are partly carrying higher debt). Among financial equities, momentum is shifting away from real estate stocks (particularly residential property stocks, which have already generated large gains, appear to have reached a peak) toward banks and insurance companies.
The final quarter of the year promises to be quite suspenseful. Generally, the environment remains positive for stocks. It seems unlikely that much will change with respect to the low interest rate environment in the long term (in spite of homeopathic adjustments). While recent macroeconomic data are not exactly inducing euphoria, they can definitely be called solid. Recently released leading indicators inspire confidence. The price of oil has leveled out around the USD50/ bbl. level, which the majority of companies in the sector should more or less be able to live with.
The fundamental setup appears to be sound. The main arguments in favor of stocks remain dividend yields and the lack of investment alternatives. Technical analysis also looks favorable for stocks. Many indexes (inter alia STOXX 600, DAX and ATX) have only recently formed a so-called “golden cross”, a clear buy signal from a technical perspective. In fact, from a technical perspective the ATX currently appears to be the strongest of the indexes mentioned above. “The trend is your friend” as they say, and since June it is clearly pointing higher. In seasonal terms the last quarter of the year is usually strong as well. Should there be no negative news flow on the US elections, Brexit, Deutsche Bank, etc., nothing would stand in the way of additional price gains. Therefore: Please, no surprises!
Author:
Christoph Schultes, MBA, CIIA
Chief Analyst
Erste Group Bank AG
7 Oktober 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.