OTP Asset Management Romania sees an economic growth of 4 percent this year and an inflation rate of 3.4 percent in December, according to it’s report for the second semester of the year, “Outlook H2 2018”. The analysis presents a review of the evolution of financial markets in the first half of 2018 and the company’s expectations for the second half of this year.
The main ideas regarding the evolution of the financial markets presented are the following:
- Growth perspectives globally;
- 4% GDP growth and 3.6% inflation by the end of the year;
- The investment portfolio of the bond portfolio was the return of inflation, and that of stock portfolios, stake on Value-type companies, to the detriment of Growth;
- We expect to close the year with values of the main international stock indices above current levels.
From a macroeconomic point of view, the short-term growth prospects are still favorable at a global level, but with extremely weak monetary policy being over and more aggressive protectionist measures emerging, the risks are on the rise.
The Eurozone economy seems to remain in good shape, as it is expected that the labor market will improve domestic demand. Monetary policy still lax and healthy growth pave the way for another favorable outcome of GDP at European level in 2018. However, economic growth is expected to slow down later as the normalization of monetary policy approaches. It is also important to underline that the prospect of rising interest rates is not a positive sign, especially for countries such as Italy where the challenges of debt sustainability and high political uncertainties predominate.
After the disappointment in the first quarter, it is expected that Romania’s economy will recover later this year, as labor market conditions provide support for consumption; but the stellar results of 2017 are hard to reach because the external economic conditions have become less favorable, the impact of fiscal stimulus measures is blurring, monetary policy is getting stricter, and the excellent harvest of agriculture last year is unlikely to repeat itself. GDP growth in Romania in 2018 may reach 4 percent and is expected to slow down slightly in 2019.
Inflation may reach its peak around the current level and may fall to 3.6 percent at the end of this year, as the base effect of some of the previous exceptional measures will disappear. In 2019, inflation can stabilize close to the 3 percent threshold, slightly above the NBR’s tolerance threshold, as tight labor market pressures remain strong, and consumer prices recover at global level. The reference rate is expected to reach 2.75 percent by the end of 2018 and may increase to 3.25 percent in 2019.
The 3 percent deficit target this year seems to be a challenge, especially since the cash-based budget statistics were disappointing at the beginning of 2018. We believe that this year’s budget deficit could reach about 3.8 percent of GDP. However, the government seems to be committed to the deficit target. Therefore, similarly to 2017, corrective measures could be implemented to keep the gap close to the 3 percent ceiling.
With regard to developments in global financial markets, it is increasingly evident that minimum bond yields in EUR, USD, or RON have already been recorded in previous years, and for the next period we are still expecting increases in interest rates. The geopolitical shocks in the first part of the year generated volatility in bond markets, most affected by emerging country bonds and corporate bonds with a higher risk.
In Romania, pro-inflationary measures taken by the government have made the Romanian government bonds denominated in lei unattractive, with corrections in the first half of 2018. Local political noise, rumors about the freezing of contributions for the second pillar of pensions in the second semester and its possible option since 2019, legislative instability and rising inflation beyond expectations are all additional risks that have had a negative impact on the yields on Romanian government securities.
Since February, volatility has returned to international stock markets. Thus, the stock indices were traded with high price oscillations. A significant influence on the evolution of the actions was the change of American policy towards increased protectionism.
As far as Romania is concerned, the news related to the Private Pension Pillar II, accompanied by the developments of the border markets, of which Romania is a part, have led to significant corrections for the shares traded on the Bucharest Stock Exchange.
The main investment theme of OTP Asset Management Romania’s investment team in the case of bond portfolios was the economic growth and the return of inflation both in Romania and the US and a small increase in the Eurozone. Under the conditions of global economic growth, we favored credit risk at the expense of interest rate risk. For stock portfolios, as early as January, we have decided to invest in Value Companies at the expense of Growth companies, expecting them to be better off for global corrections. Investments were directed to both US and global value companies.
As in previous years, one of the main investment themes identified on the local market was that of attractive dividends offered by Romanian companies. With the re-emergence of news related to Pillar II of Pensions, we decided to reduce exposure to Romanian companies, preferring to be under-exposed to the benchmark. Under these conditions of high uncertainty, exposure to Romanian companies is at the lowest level in the last 4 years.
Given that companies’ financial results are on the rise and the world economy is performing well, we expect to close the year with the main international stock indexes above the current levels.
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