Three themes to look out for this autumn

As interest rates remain low, equities retain their investment appeal over fixed-interest securities

Three themes will probably keep the international capital markets on their toes over the coming weeks:

1. Central banks: Even though the US central Bank (Federal Reserve Bank, Fed) has become a bit more concrete and left its options open for an initial rate hike in December, the European Central Bank (ECB) is holding out the prospect of deciding at its December meeting to further reduce already negative deposit rates and to expand either the amount or the term of its bond purchase programme, according to its most recent announcements. With inflation currently low – indeed, well below the 2% target of both central banks – and concerns about the growth prospects of the emerging markets and the adverse effects they may have on others abounding, both the ECB and the Bank of Japan (BoJ) have reason enough to maintain or even expand their expansionary monetary policy.
2. China: Although economic output increased by 6.9% in the third quarter of 2015, it was still the lowest rate of growth since the global recession back at the start of 2009. China’s leadership has already warned against exaggerated expectations for the country’s economic development, especially with regard to the growth target of 7% for 2015. China’s monetary authorities have taken three steps in response to persisting worries about the economy: 1) they have lowered the base rate; 2) reduced the deposit rate governing how much banks receive for money parked with the central bank; 3) lowered the minimum reserve rate specified as the share of customer deposits for each bank by the central bank. These steps, together with the monetary policy and investment incentive measures that have already been put in place, do not seem to be giving any new impetus to fears of a real “hard landing”.
3. Reporting season: The third quarter of 2015 reporting season is confirming that corporate earnings among the major corporations are not as abundant as they have been in past years. Although most companies are beating their profit targets (which they previously lowered), this is mainly due to lower costs rather than higher revenues. The reasons for this development can be found in the stronger US Dollar, low global demand and weak commodity prices. Having said that, positive surprises could still inject new stimulus into the markets after the mixed start. Valuations – especially of European securities – seem to be staying moderate, and there are signs that the earnings cycle might be starting to catch up (with the US).

The prospect that the ECB and BoJ may loosen monetary policy further could strengthen the Fed’s resolve to further postpone the first interest rate hike since 2006. In light of persistently low interest rates, possible stabilization of China’s economy and positive stimulus from the corporate side, equities remain an attractive option compared to fixed-interest securities.

Stefan Scheurer – Vice President, Global Capital Markets & Thematic Research – Allianz Global Investors