Fixed interest investment managers are expecting strong economic growth in the eurozone this year on...
Fixed interest investment managers are expecting strong economic growth in the eurozone this year on the back of an improving global economy.
Scottish Equitable Asset Management is forecasting growth in the eurozone will be around 3.5% this year, which is similar to the consensus view.
The group, however, is expecting growth of 3.4% to 3.5% next year, higher than the consensus forecast of 3.2%.
Roberto Carulli, portfolio manager at Scottish Equitable Asset Management, says: "We believe economic growth will continue to be supported as global growth is still strong.
"The economy in Europe is being supported by a rise in consumer confidence as real incomes are rising and unemployment is falling.
"Business confidence and business spending are also rising. However, we have seen inflation numbers rising recently especially in Spain, the Netherlands and Ireland and the core inflation rate for the whole of the eurozone has also been rising.
"One of the main reasons for this has been currency weakness which is feeding through to input prices. We see an inflation rate of around 2% for this year and around 1.7% next year. But we believe the oil price increases have reached the high point."
The markets are expecting a further 50 basis points in interest rate increases this year which would take rates to 4.75%, but Scottish Equitable Asset Management is expecting a further 25 to 50 basis points rise in rates next year.
Paul Read, joint head of fixed interest at Perpetual, says: "Our view is that we are reasonably positive on the outlook for European growth.
The economic data recently has been mixed but on balance we feel that the underlying trend on growth in the economy remains reasonable.
Confidence is reasonably high although there is a decent chance that the European Central Bank will raise interest rates by another 50 basis points and then probably hold rates for some time. Inflation is also something that we need to be keeping an eye on."
Carulli adds: "The valuations of the eurozone bond markets have become a bit expensive although valuations against the equity market are quite good. We would expect the 10-year bund to trade in a range between a yield of 5% to 5.5% and we are currently at the bottom of that range."
Carulli is underweight 10 year bunds as he says that fair value for this area of the curve is a yield of around 5.3% and he expects yields to rise to this level from the current yield of 5.15%.
He is favouring the short and long end of the yield curve in the eurozone, with 30 year bunds on a yield of 5.28% and one year bunds offering a yield of 5.05%.
Read adds: "We think the bond markets are fairly valued and do not think there is going to be a significant rally in European bond markets. There is probably better value in the five year part of the curve and I think relative to the UK there is good value at the long end in Europe. I am not expecting big capital gains out of government bond markets in the eurozone."
Five year bunds are currently offering a yield of 5.2%. At the 30-year end of the curve, bunds are on a yield of 5.3%, compared with 4.4% for 30-year gilts.
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