Pohjola Bank : OP Financial Group analysts: Which assets deliver the best returns after the fall of interest rates?

Global economic growth missed estimates (IMF: 2.6%) once again in 2014. OP Financial Group's analysts nevertheless expect that the pace will accelerate to 3% in 2015, with US consumer demand acting as the strongest link in the economy. Recovery of the US housing markets together with rising capacity utilisation rates encourage investments. In the euro zone, any positive growth surprises will be driven by the US, while the tumbling oil price will counterbalance the harm caused by Russia's trade restrictions. The unity of Europe will be on the agenda in 2015 owing to the parliamentary elections during the year as well as to the ECB's QE package and European Commission Chairman Juncker's investment package. The emerging markets themes include the consequences of capital flow and raw material price changes as well as monetary policy leeway.

Merely 20% to 35% of the oil price drop is attributable to slower economic growth. The oversupply of oil totals about one to two million barrels and it is this excess production that is depressing the price. We expect that the price will fall to the level of 2008 (below USD 40/barrel). Although markets continue to be nervous about emerging markets, raw material prices and geopolitical risks, the economic surprises in the West have been positive as of late. The ever lower interest rates continue to back riskier asset classes, though the support from fixed income markets is now winding down. The broader market movements have fuelled volatility in currency markets especially.

European banks' stress test and AQR results publications revealed surprisingly small capital deficits. While the tests reinforced confidence in the banks' balance sheets to some extent, the banks' muted earnings prospects have capped the rise in valuations. European banks have limited direct exposure to Greece today. However, if Greece exits from the euro and this sends markets into turmoil, the consequences would be inevitably negative for the sector.

- Out of the asset classes, we favour USD-denominated equity investments and high yield corporate bonds. We anticipate that the robust US economic growth and the growing consumer purchasing power will support corporate earnings. In Europe, the earnings outlook is milder because of the geopolitical risks. We remain underweight Finnish shares because of the Russia risks, which blur their outlook. In fixed income investments, we favour corporate bonds over government bonds, the analysts note.

- The strong USD drove currency markets during the latter half of 2014. The conditions for a continued rise remain in place: the US will stay on the strong growth track and the expectations for a Fed rate hike contrast heavily with the ECB's and Bank of Japan's expansionary measures, says Jukka Ruotinen, Head of Fixed Income and FX Research.

- In the corporate bond market, we see the most value relative to company-specific fundamentals in the corporate bonds of Cargotec, Cramo, Nokian Tyres, Orion, Outotec, PKC, Ramirent, Sponda and Tieto. Further, we find that the corporate bond yields of Elisa, Metso, Metsä Board and Nokia are the least attractive relative to their credit ratings, Ruotinen adds.

In the European equity markets, OP Financial Group's analysts favour the sectors that gain from the improvement in consumer purchasing power as a result of the cheaper oil, or from the rise in liquidity as a result of the expected ECB stimulus measures. These include automobiles & parts, personal & household goods, travel & leisure, retail and financial services. The analysts are most pessimistic about basic resources, food & beverage, technology, telecommunications and utilities.

- Our favourite Finnish shares are Amer Sports, Caverion, Huhtamäki, Metso, Metsä Board and Nordea. In contrast, we recommend avoiding the shares of Fortum, Kone, Nokia, Sanoma, UPM-Kymmene and YIT, says Equity Strategist Antti Saari.

For more information, please contact:

Jukka Ruotinen, Head of Fixed Income and FX Research, tel. +358 10 252 2792
Antti Saari, Equity Strategist, tel. +358 10 252 4359

OP Financial Group is Finland's leading financial services group providing a unique range of banking, wealth management and insurance services. OP's mission is to promote the sustainable prosperity, security and wellbeing of its customer-owners, customers and operating regions. Its objective is to offer the best and most versatile package of loyal customer benefits on the market. OP Financial Group consists of about 180 member cooperative banks, its central institution OP Cooperative, and the latter's subsidiaries and affiliates. The Group has a staff of 12,000. OP Financial Group has 4.3 million customers.

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