7.10.

2011

EVLIWEALTHMANAGEMENTMONTHLYREVIEW
The uncertainty continues
The fears have not gone away Equity market nerves and weakness continued in September. The emerging equity markets fell the most. This was caused by a decline in the price of commodities and a deterioration in the global economic outlook. The rate of global economic growth is generally expected to slow down next year from approximately 4% that was predicted earlier to 3%. Basic industry companies also felt the effects of the decrease in commodity prices, and their share prices fell more steeply than those of companies in other industries. The European banking industry was also under pressure, with only occasional small rallies. The situation of banks has become increasingly difficult due to the continuation of the euro area debt crisis. Provision of long-term finance has stopped almost entirely and values of bonds with lower priority (subordinated bonds) have taken a nose dive. In order to improve the situation of banks, measures by the European Central Bank or a Troubled Asset Relief Program similar to the one set up in the US have been suggested and anticipated. European financial stability arrangements were pushed ahead Progress was made regarding European financial stability arrangements when the German parliament voted in favor of expanding the European Financial Stability Facility, the euro areas temporary crisis fund. The decision was preceded by a comprehensive assessment of Greeces economic situation, which did not produce promising results. Balancing the Greek economy is a very difficult task, but Greece is likely to receive its bailout installment in October. What will happen next remains uncertain. The planned measures will most likely focus on limiting the damage caused by Greeces insolvency. The euros exchange rate plunged below 1.40 against the dollar. The euro also weakened by almost 6% against the Japanese yen. The currencies of many emerging markets also declined as a result of the commodity price decline. Economic data for September better than expected Equity market sentiment fluctuated considerably, depending on the news. Hopes were raised by the progress of solutions for Greece and economic indicators that were marginally better than expected. Indicators which reflect industrial business outlooks that were published in September were also better than feared. An equity market crash was not witnessed yet in Europe or the USA. Equity valuation levels seem attractive now, but the uncertainty over corporate profit performance, in particular, is reducing the appeal of equities. Dividends are likely to fall if the economic situation continues to deteriorate, and investors dividend income will decrease. Equity prices are also low in relation to book values. Continuing economic weakness would most likely result in write-downs also in balance sheet values. Corporate earnings expectations are deteriorating rapidly, even though only a few actual profit warnings have been issued. The reduction in earnings is not yet fully reflected in equity market prices. Although many companies end-of-year sales and production have already been established, there is considerable uncertainty regarding the outlook for the coming year. The longer the crisis in the euro area continues, the more challenging the situation will be for companies. Companies will start reporting third-quarter results within a few weeks. The equity markets will turn their attention from companies economic data to earnings and, above all, the rest-of-year outlooks. Should we be expecting profit performance to halt as rapidly as it did at the end of 2008? This is what we are seeking signs of now.

7.10.2011

Picture: Equity markets predict a significant weakening in companies business outlooks

This review is intended only for the client's personal and private use. This report is based on sources that Evli Bank Plc considers correct and reliable. However, neither Evli Bank Plc nor any other entity accepts responsibility, or gives any guarantee, whether directly or indirectly, concerning the materialization, correctness, accuracy or completeness of any information, views, opinions, estimates or forecasts presented in this report. All rights reserved. This publication or any part thereof may not be copied, reproduced or transferred in any form or in any way, whether electronically, mechanically, by photocopying, recording or otherwise, or stored without Evli Bank Plc's written consent.

Evli Bank Plc, Aleksanterinkatu 19 A, P.O. Box 1081, FI-00101 Helsinki, Finland, Telephone +358 9 476 690, www.evli.com