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„2011 is the year of
tangible assets and shares"
Peter Brezinschek, Chief Analyst at Raiffeisen Research, is optimis-
tic about economic development and sees excellent opportunities for
Austrian investors on financial markets this year. He advises investing in
shares and tangible assets above all.
The economy in Europe has regained momentum. Has the
economic crisis finally been overcome, will the upward trend
be sustained?
PETER BREZINSCHEK: Following the upturn
in 2010, which was primarily export-driven, it has been the case
since autumn 2010 that capital investments have gained mo-
mentum worldwide due to the confident assessments made by
companies. These investments are now providing a second line
of support to the economy, especially in Germany and Austria.
Together with corporate earnings that are on the rise again, this
means that in 2011, and in 2012, investment will probably drive
growth. It will also create jobs, resulting in more private spend-
ing power. This should give the whole upswing a certain breadth.
It can already be said that the upturn has developed its own
dynamics, making us confident that it will continue through to
2012. Admittedly this is not all the same throughout Europe. We
have very different pictures: in countries with high levels of debt,
economic momentum is much weaker.
Are you not concerned that the crisis will hit again – the oft-
mentioned and feared "double-dip"?
Falling back into recession
has turned out to be a fear-inducing myth. Although the UK, for
example, shrank in the fourth quarter of 2010, it should improve
this year. The major tax-cutting measures introduced by the
Obama administration also takes pressure off private spending in
the USA in 2011.
"More debt, less unemployed – a fairy tale"
Some experts claim: although the economic crisis is over, we
are now faced with collapse in high-debt countries such as
Greece. What would this mean for Austria?
"Collapse" is too
negative a word. It is very much the case, however, that high-
debt countries are faced with a significantly more challenging
economic environment than those with solid public finances. In
2010, and even in 2009, Greece had a declining economic output
and must now accept another shrinkage because the country has
lived above its means for too long. The proposition that "More debt
means less unemployment" is unfortunately a fairy-tale and not
an economic fact, because very high debt invariably entails high
repayments and tough restructuring measures. This restructuring
also costs growth. Here in Austria we are still on the comfortable
side because we do not have these excessive burdens of debt,
and as a result we can also participate fully in the upturn. Last year
our exports saw double-digit percentage growth and will continue
to grow strongly this year. Because it has a sound economic struc-
ture and its industry and exports are highly competitive, Austria is
in a position to take full advantage of the international upturn.
If central banks increase interest rates, then high-debt states
will crash. If the banks don't increase them, there is the threat
of high inflation? Which is worse for us? And so what will the
central banks do?
The central banks in the USA, UK, Japan and
in the Eurozone continue to hold rates at historically low levels. In
the next twelve months there will be a movement towards normali-
sation. We believe that the interest rates will be slowly adjusted
by the central banks to the circumstances. The European Central
Bank (ECB) has announced the first interest rate increase for
April, which should be followed by others in the second half of the
year. We expect that the Federal Reserve will follow the ECB in the
second half of the year with further interest rate hikes. However,
even interest rates at a percentage point higher will not slow
down the economy. This could become very expensive for Euro
peripheral countries. As a result the longer-term capital market
rates will experience a further rise, as has been the case for some
time, because inflation rates are going up not only in Europe,
but also in the USA and especially in emerging markets. In the
case of Asia and Latin America, for example, but also in Eastern
Europe, it is very likely that further interest rate increases will be
applied in order to combat inflation in 2011.
So overall, there will be interest rate hikes, but they will be
moderate? But could that not jeopardise the upturn?
Actually,
based on the high growth figures for Germany and Austria, key
interest rates shouldn't be around one per cent, but should prob-
ably be 3.5 per cent. But in the Eurozone we have to compromise
between the strong economies and those with problems, such as
Spain and Greece, where there is still stagnation. As a result, at
present the European Central Bank does not intend to respond to
the temporary rise in the inflation rate above the 2 per cent mark
with drastic interest rate rises, but to react moderately. Ger-
many and Austria benefit from this. With low interest rates to aid
business, we are in the same privileged situation as Spain, Italy,
Greece were ten years ago, when they adopted the Euro and the
ECB took the "sick giant", Germany, into consideration. Of course,
this now gives us the chance to take out loans that are low-cost
relative to expected returns, and to invest.
What if the high-debt EU countries cannot extricate themselves
from the crisis?
They must get out of it, it's as simple as that. You
can't cover old debts by taking on more and more new debt. Credi-
tors have become very alert in this respect, and at some stage
want to get their money back again. For this reason the high-debt
countries will have to cut back even more on their spending. In
2012 too, many of these countries will still be far from meeting
Maastricht stability criteria. Public debt will continue to rise, and
that is not a confidence-inspiring sign that the financial markets
will reward. On the contrary, high-debt countries must pay higher
interest rates for their public debts. It is clear that the restructuring
measures that have so far been announced do not go far enough.
More ambitious action is definitely required. In that case, investors
would look at government bonds with more trust.
Are you not concerned that the Eurozone could break up?
I don't fear that it will collapse. I assume that high-debt countries
will learn from their mistakes and will prioritise restoring their
competitiveness. Once this has been restored, they will be com-
petitive again on international markets. They can then bring in tax
revenues and reduce their high current account deficits, so these
countries must also take out fewer international loans.
Finance minister benefits
from Greece for the time being
But with these high levels of national debt, is it still possible at
all to invest in government bonds?
It must be said that, overall,
we are in a phase where yields are at historically low levels.
Austrian yields in the ten-year range, at just under 3.6 per cent,
are far lower than before the financial markets crisis, when they
were 4.6 per cent:in other words: Austria's finance minister has so
far benefited from the Greece crisis. He is paying very low interest
on government debt because the capital market rates are much
lower than they would have been if Griechenland und Portugal
did not have these difficulties. Germany is the biggest beneficiary
in this respect.
So do not buy government bonds in the current climate of low
interest rates?
The economy has recovered, capital market yields
are linked to the economy, so yields on government bonds must tend
to rise in the next twelve months. Because of the low yields, I consider
investment in government bonds to be hardly worthwhile at present,
when it can be expected that the yield on Austrian government bonds
will, at some stage, again have a four before the decimal point – as a
sign of a strong economy. If you invest now in low-interest govern-
ment bonds, you would probably incur losses on the price as soon as
interest rates rise again somewhat.
What are the alternatives?
There are highly attractive corporate
bonds which, in our opinion, would be a wiser choice – including
from borrowers with a good rating, yields between 4.5 and 5.5 per
cent, and with maturities that are not too long. In the same breath
one could also mention Raiffeisen bonds with rising interest cou-
pons. However, our special recommendation is: during periods
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