In March the European Central Bank (ECB) has started its "expanded asset purchase programme" under which it plans to buy securities amounting to 60 bn EUR per month until the end of September 2016. An amount of approx. 50 bn EUR will be invested in sovereign bonds according to the ECB capital key. Given the Austrian capital share of 1.96%, slightly less than 1 bn EUR of the monthly purchases should be Austrian government bonds. There will also be further accommodation of the monetary stance via the targeted longer-term refinancing operations for banks, providing funds with maturities up to September 2018, linked to the main refinancing rate.

A low level of euro interest rates and yields thus seems to be ascertained for a while. International interest rates, namely in the US, however, seem already set to rise in the course of this year. This puts the long lasting stock market boom at risk, which in Austria has not fully unfolded yet. In her latest monetary policy report to the Congress, Chair Janet Yellen said that the Federal Open Market Committee (FOMC) would consider a modification of its forward guidance on interest rates if economic conditions continued to improve as the FOMC anticipates. Although the elimination does not mean that the fed funds rate will be increased at one of the following meetings, market rates are set to start rising as soon as the forward guidance will be modified, which we expect to happen in the course of the next few months.

The likely trend reversal of interest rates and yields abroad is not the only case for diversification and the need to prepare for different scenarios for investment. There is a long list of political uncertainties that could cause a set-back on capital markets. Besides geopolitical issues and their economic consequences there is the uncertainty about the future of Greece in terms of economic policy and state finances, where only a short-term solution has been found yet. With the unfolding economic recovery and reasonable fundamental valuations (also of the ATX), the European stock markets continue to be attractive to investors. However, hedging, diversification and admixture of alternative and/or structured investments will probably increase in importance throughout the year.

Uta Pock
Head of Research
Österreichische Volksbanken-AG
4 March 2015


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