Which return from US equity market?

Following the huge uptrend since last March, the outlook for the S&P 500 and other leading international stock indices appears to be clouded in uncertainty. A major short-term negative for the S&P 500 is that the recent strong rally has brought the index to an overbought level (as an example, its latest close was 15% higher than the 200-day moving average). The S&P 500 has never experienced such a sharp increase (+58%) in such a limited time period. However, even though we believe that an equity market correction is a near-term possibility, we would not lighten up positions or exit the equity market until a clear trend reversal takes place as we would not try to sell at the top of the market but to remain invested in the trend direction.

But institutional and long-term investors had better focus on the equity market medium/long-term prospects than on the S&P 500 short-term swings. Projecting the equity market performance for the 10 years ahead is key for determining how to allocate a portfolio between equity funds and bond funds. Although this is no easy task, we will try to predict the S&P 500 moves for the next 10 years using the John Bogle’s (founder of Vanguard Mutual Fund Group) model we find on the Mark Boucher’s book "The Hedge fund edge".

Under the model, we should take the dividend yield at the beginning of the projected decade to forecast stock and bond returns in the following 10 years, add the average annual earnings growth for the past 30 years and compute what rate of return would have to develop over the subsequent 10 years to achieve that average P/E at the end of the term and add this final number to the previous table. As we can see in the chart below this model has a good track record for projecting the S&P rate of return. We are looking for an average annual return of 8% for the S&P500 from now to 2019 with a range between 3.5% and 12.5%. Even though this rate of return is lower than past returns, we believe this is enough to recommend investors assigning a neutral weight to the equity market in their institutional portfolios. Indeed, with the 10-year US Government bond at 3% the S&P 500 is likely to post the extra-performance needed to invest in equities.

Norges Bank drives Norwegian Krone outlook

As widely expected, the Norges Bank decided to leave the key policy rate unchanged at 1.25% at today’s monetary policy meeting. Nevertheless, in the statement released after the meeting, the Central Bank announced that the Executive Board had considered the alternative of increasing the key policy rate.


The Bank highlighted that activity in the global economy and Norway’s economic growth had been stronger than initially projected in the Monetary Policy Report 2/2009 (published on 17 June). Core inflation now stands at around 2.5% in spite of the appreciation of the Norwegian Krone and above-estimate but still poor economic growth. With international financial markets recovering some ground and Norwegian house prices nearing to the 2007 historical high, the Norges Bank will likely begin removing its ultra-expansionary monetary policy in the short term. Following today’s monetary policy assessment, it is highly likely that the Central Bank will raise rates at the October 28 Monetary Policy Meeting, with a 50bp rate hike as a clear possibility. The Monetary Policy Report due for publication the same day will provide further hints about the prospects for the monetary policy.

An increase in the interest rate will therefore result in Krone appreciation in the medium term. With both the Fed and the ECB likely to hold the key policy rate steady for some months, the interest rate differential will become more favourable to the Norwegian Krone going forward. The country’s economic activity is also likely to improve sharply due to the fiscal stimulus that is being implemented. The productivity differential against the Eurozone will therefore widen. The Norwegian Krone would be a strong buy should oil prices resume an upward trend.

Governor King pushes Pound downwards

If the publication of the Bank of England’s August quarterly Inflation Report halted the upward trend in the Pound against the Euro, highlighting the country’s negative economic and inflation outlook, Governor Mervyn King’s speech to lawmakers last week contributed to further depressing the UK currency. King said that the Bank of England may soon decide to cut the deposit rate (i.e. the rate at which the liquidity that commercial banks deposit with the Central Bank is remunerated), which now stands at 0.5%. Some economists advanced the hypothesis that the UK will likely adopt the negative rate policy first implemented by Sweden’s Riksbank in July. Nevertheless, the chances of this happening look slim (the BoE's next Monetary Policy Committee Meeting is scheduled for 8 October).

Overall, King's words have intensified fears about the British economy over the coming months, indicating that the monetary policy may remain accommodative for a long time. "The strength and sustainability of the recovery is still very uncertain and the balance of risks to the inflation target of 2% remains downward" said King.

Governor King did not appear to be worried about the country’s short-term economic prospect (the inflation report suggested that a short-term rebound in economic activity is "inevitable" due to the strong expansionary policies pursued by the whole of international central banks and governments), but about the medium-term outlook, as recovering the ground lost during the crisis that hit the country over the past two years will not be easy task.

A harmful signal on the economic outlook came from a report recently published by Ernst & Young Item Club. According to the study, housing prices should fall during the first half of 2010 despite recent signs of improvement, then stabilise in the following two years and subsequently start picking up as the wider economy strengthens and credit conditions ease. But the 2007 record high prices should not be achieved before 5 years.

The sharp rise in unemployment, which climbed to the highest since 1995, will continue to weigh on the real estate sector and on the economy as a whole, and will trigger an increase in the savings ratio due to growing concerns about the labour market outlook. With government spending likely to be put under control in the near future in the face of the large deficits expected for 2009 and 2010, exports appear to be the only hope for a return to growth. Considering also that deflationary pressures are much feared by UK central bankers, a further weakening of the Pound would be welcomed by the BoE, as we stressed in the article published last August 17 A weak Pound is welcome, BoE's Governor King indicated.

Last week the Euro/Pound exchange rate marked the 0.9 level for the first time since May (+3%). Leading international bank strategists expect this trend to persist into the coming months. As an example, Hans-Guenter Redeker, a currency strategist at BNParibas, has recently set his Euro/Pound target price at 1, while Steve Barrow, a currency strategist at Standard Bank, has set a target price of 0.95. As in the case of the US Dollar, the main reason for the decline in the Pound is the change of its role during carry trade operations - from investment to financing currency due to low interest rates. With the monetary policy expected to remain expansionary in the UK much longer than in other major western economies and with the Pound unable to act as a safe haven currency during fly-to-safety phases, the British currency is to be preferred to the US Dollar in carry trade operations despite slightly higher interest rates. The Pound is likely to stay weak in the foreseeable future.

Betting on US Dollar as weapon of defence

Over the past few weeks the Euro/Dollar exchange rate has continued to move upward to exceed the 1.47 threshold for the first time since September ‘08. By contrast, better than expected US economic data during the summer was not enough to reverse the Greenback’s downtrend. Above-estimate news from the Euro area, with the German and French GDP improving by a surprising 0.3% q/q in Q2, cannot help explain the strength of the single currency. There is continued uncertainty surrounding the Eurozone economy, such as the poor health of some major economies including Italy and Spain. Moreover, the outcome of the new referendum on the Lisbon Treaty to be held in Ireland by November 2009 is another factor of uncertainty about the outlook of the European Union.

Two reasons appear to justify the Euro/Dollar uptrend. First, the short-term interest rate differential should continue to remain favourable to the Euro for several months, as both the Fed and the ECB are likely to leave interest rates unchanged for several months. In our opinion, there is still a long way to go before an exit strategy is implemented.

Second, the upward trend in the Euro/Dollar seems to be closely connected with the fall in the risk premium on international financial markets. Indeed the Dollar downtrend began last March, the month when the S&P500 saw its lowest since 1997. The negative correlation between the US Dollar and equity markets is due to the strong expansionary monetary policy pursued by the Fed: with the Fed Fund rate at 0% the US Dollar has become the new financing currency in carry trades, taking the Yen’s place. Several academic studies have shown that carry trades are profitable in the case of a downtrend in the market risk premium. The drop in the Vix below the 25.00 level, the narrowing of the spread between low-rated corporate bonds and US Government bonds and of the spread between emerging markets Government bonds and U.S. Government Bonds and limited volatility in the foreign exchange market are all symptoms of how the trend in market risk premiums is supportive for carry trades.

The U.S. Government might welcome a continuation of the carry trade aimed at weakening the dollar, provided that the move does not spark a strong reaction from the government of China, which sits on a mountain of dollars. A weak dollar, in fact, would have a great impact on the U.S. economy. First, it would boost exports and enhance American companies’ competitiveness. Second, as indicated by Hiromichi Shirakawa, a chief economist at Credit Suisse Tokyo, a weak dollar would increase the returns on U.S. investments abroad, increasing the wealth of businesses and households. Finally, a devaluation of the US Dollar would lessen deflationary pressures.

With the interest rate differential weighing on the US Dollar, carry trade operations using the dollar as the financing currency expected to continue due to the uptrend in market risk premiums and the U.S. Government that seems to view favourably the dollar’s devaluation, despite claims to the contrary, the current situation seems to favour a further appreciation in the Euro/Dollar in the short term.

Nevertheless, investors holding positions in the equity market should not bet on a further appreciation of the Euro/Dollar. Indeed, the strong correlation between the exchange rate and the equity market in recent months has given evidence that investing in the Euro/Dollar would not impact positively on a portfolio diversification. By contrast, building positions in favour of the US Dollar against the Euro could turn out to be a more viable solution.

First, the interest rates differential should not penalize the US Dollar as long as it did with the Yen, the carry trade financing currency ahead of the US Dollar. In fact U.S. interest rates (once clearer signs that the country has pulled itself out of the recession of the past two years emerge) will likely rise more quickly and achieve a higher level than those in the Euro area, although this scenario should not materialize before 2011.

Second, due to the recent upward move, the Euro/Dollar is overvalued by over 25% according to the Purchasing Power Parity (PPP) calculated by the OECD. 20% deviation from the fair value has historically been followed by a correction phase. As shown in the chart below constructed using the German Mark as a proxy for the Euro in the years ahead of its introduction, strong deviations from the fair value calculated by the PPP were followed by counter-trends to correct previous excesses. Therefore we are now looking for a Dollar revaluation in the medium term. This would not occur should inflation rise more markedly in the US than in the Euro area and therefore align the PPP with the Euro/Dollar’s present value.

What is behind gold rise above US$1000oz ?

Last week, market attention focused on the increase in gold prices, which marked the US$1000oz threshold for the first time since last March. Various explanations were provided for the upward trend in gold prices. First, fear that the ultra-expansionary monetary and fiscal policies adopted by central banks and governments around the world, particularly in the U.S., might prompt a sharp turn to the upside in inflation over the coming quarters. Indeed, over the last few decades gold has turned out to be one of the most reliable indicators for estimating the inflation trend in the subsequent 12 months. For this reason, the rise of gold prices to a new high would send a warning signal on the inflation outlook for the months ahead, and the consequences would be felt primarily on long-term interest rates. Nevertheless, inflation concerns appear to be overdone as the inflation outlook for the coming months does not look particularly alarming, given the low capacity utilization and the continuation of the deleveraging process by leading international economies. The expected inflation rate, calculated as the difference between the 10-year nominal rate and the real rate on Treasury TIPS, has now steadied around acceptable levels and is in line with the historical average.

Paradoxically, the rise in gold prices could be evidence that the market should begin to price in a deflationary scenario. One of the main lessons of the Great Depression in 1929, in fact, is that gold may be a hedge against the currency devaluation imposed by the monetary authorities during the most severe deflationary phases. Despite signs of an economic recovery in recent months, worries that the economy might get into a prolonged deflationary cycle have become increasingly acute. Indeed core inflation could continue to fall for several months even under the most optimistic hypothesis that the US pulls itself out of recession. The slowdown of core inflation might even deepen should the W-shaped economic scenario much-feared by some economists materialize.

Therefore, the reasons for higher gold prices should be found elsewhere. One possible explanation may offered by the purchases of gold made by the Chinese government. In an interview with the UK daily newspaper at the Ambrosetti Workshop in Cernobbio, a Chinese government official said that the country’s authorities are concerned about the repercussions of the ultra-expansionary U.S. policy on the US Dollar and pointed out that gold is a viable alternative to the greenback, although market purchases must be made with caution not to push higher gold prices. His words appeared to confirm that China aims to increase the proportion of gold in its reserves, hence persuading traders that gold prices are likely to go up in the medium term.

Investors’ behavior might offer another reason for the rise in gold prices. Following the investment boom in 2007, commodity investments were stopped in 2008 but recovered in the first half of 2009 (as highlighted in a recent report by Macquarie) thus favouring a rebound in commodity prices from the depressed levels last seen at the start of this year.

Finally, gold prices might have been driven higher by the belief of major gold producers that the upward trend in gold prices is set to continue into the coming months. During the week, in fact, Barrick Gold, the world’s No.1 gold producer, unexpectedly announced its plan to spend $5.6 billion in the third quarter to close out its hedge book. The closing out of Barrick’s hedge book is likely to bring further pressure on prices and forcing competitors to implement the same move.

Whatever the real reason behind the gold prices increase, most investors believe that gold prices are highly likely to mark and leave definitively behind the US$1000oz threshold. A recent survey conducted by Bloomberg showed that 10 analysts out of 12 believe that gold can exceed the record high of US$1033oz hit in March 2008 in the short term. Some analysts also believe that gold prices will likely continue to follow their upward trend in the months to come. As an example, Citigroup’s technical analysts in a report published in late August have estimated that gold may go up to US$1190oz and reach US$1300oz by the end of this year.

Institutional investors looking for a further increase in gold prices include CMC Markets, with a year-end target price of US$1200oz, and Investec Asset Management, which sees gold rising to US$1150oz. By contrast, Heraeus Precious Management sees gold prices nearing US$1050oz in the short term but retreating to US$700oz by year-end.

Anticipating the trend of gold prices is no easy task. Therefore, holding the precious metal seems to be an advisable option at this time of year because of the high uncertainty surrounding the economy and with a view to protecting the portfolio risk exposure. 

What’s happening to China’s stock market?

Notwithstanding the continued uptrend in major international equity indices, the Chinese equity market lost 21.81% in August, compounding investors’ fears over the country’s economic outlook. Not only did these fears (which were only partially dispelled by a recovery towards the end of last week) weigh on the equity indices of other emerging markets, but also on leading international equity markets. Although the decline in the Chinese stock market was not the main trigger for the downtrend in western equity markets, which was due to persistent doubts over the sustainability of the current economic upturn, it certainly played a role in it.

Both the decline and the upsurge of the Chinese market have been mainly sparked by the sharp increase in liquidity and bank loans due to expansionary monetary and fiscal policy implemented by the Chinese Central Bank. Indeed rumours circulated in August that the Bank is highly likely to tighten its monetary policy in the second half of 2009. Based on data released by the China Business News, as much as 20% of the largest loans granted in the first half of this year have been invested in the Shanghai stock market. The latest press rumours suggesting that new loans slumped to 300 billion yuan in August from 356 billion yuan in July and an average of 1.231 trillion in the first half of the year have reinforced fears of a slowdown in liquidity growth.

Worries about a possible exit from the current accommodation have led investors to play down encouraging signs of an early recovery in the real economy. The manufacturing PMI hit 54 in August, its highest for the past 16 months and a figure suggesting positive growth in the manufacturing sector.

Robert Zoellick, World Bank president, said that the outlook for the global economy has improved recently thanks to reassuring signals coming from China. The World Bank president also confirmed that the Chinese economy is expected to grow by 8% in 2009, but he recommended not to remove the monetary stimulus as the economic recovery is fragile and inflation is not cause for concern at present.

In an article published on his website (http://www.mpettis.com/), Michael Pettis, professor of finance at Peking University and one of the foremost experts on the Chinese economy, confirmed that the market decline was due mainly to factors related to developments in speculative liquidity. “Why did the market collapse? Forget about fundamentals. As I have argued many times before, China lacks the necessary tools that fundamental investors use (e.g. good macro data, good financial statements, a clear corporate governance framework, a stable regulatory environment, a market discount rate) and so no matter what people say, there are no fundamental investing here. There is only speculation, and the two things above all that drive the markets are those old speculator favorites, changes in underlying liquidity and government signaling". The weak correlation between economic fundamentals and stock markets’ trend in emerging countries has been also underlined by Paul Marson, CIO of Lombard Odier, in a recent article published in the Financial Times. 

China’s Premier Wen Jiabao, following the declines of recent weeks, gave a

speech on Tuesday September 1st (the day after the 6.7% drop in the stock market) to assure that the expansionary monetary and fiscal policy will not be removed shortly as the recovery is still at a critical point. The market response to Wen Jabao’s speech has been positive, with the Shanghai market index partially recovering the ground lost on Monday 31 August.

Moreover, a further slump in the Chinese equity market would hamper the effectiveness of the stimuli implemented recently by Beijing. For this reason, Pettis believes “that if the local stock markets do not soon recover their bounce (and they won’t without government help) and, even worse, if we start to see the awful sentiment seep into the real estate sector, Beijing will once again push forcefully for credit and fiscal expansion”.

Pessimistic about the outlook for the Chinese stock market is Andy Xie (Andy's article published in August), a former chief economist for the Asian economies at Morgan Stanley and now an independent analyst. According to Xie, it is very likely that both the stock and the real estate market are in a new bubble. "Chinese asset markets have become a giant Ponzi scheme. The prices are supported by appreciation expectation. As more people and liquidity are sucked in, the resulting surging prices validate the expectation, which prompts more people to join the party. This sort of bubble ends when there isn’t enough liquidity to feed the beast”. However, current liquidity levels are not cause for concern. Xie, who considers the equity market 25% overvalued and estimates that it will fall below the 2000-point threshold, believes that the stock market can continue to hover around these bubble levels for some time to fall permanently in Q4 or during next year. The main trigger for the downturn should be a strengthening dollar, historically a source of danger for the emerging markets, which should be underpinned by a rise in interest rates as a result of a possible higher inflation.

Overall, the outlook for the Chinese stock market is clouded in uncertainty. Although the strong liquidity injection will likely support the equity market in the short term, the inevitable withdrawal of excess liquidity will have negative effects on Shanghai going forward. And the severe repercussions of excess credit and liquidity on western economies are still there for everyone. For these reasons, staying away from the Chinese equity market will prove to be the wiser choice for European investors (by contrast it could be a golden opportunity for traders due to its high volatility). However, the trend shown by the country’s equity market in the last few days is clear evidence that the decline in the Chinese stock market will certainly impact on western European markets. European investors are highly recommended to give every morning a look at the Chinese stock market close.

ECB held rate on hold at 1%

No major surprise come from today’s ECB’s monetary policy meeting. The ECB left rates unchanged at 1% and indicated that “that the rate for the twelve-month longer-term refinancing operation to be allotted on 30 September 2009 will be the prevailing rate on the main refinancing operations”. Notwithstanding the signs of recovery come from economic data published in the last few weeks, the ECB believe that the economic outlook is still uncertain. The upward revision of economic growth projections (GDP is now expected to fall by 4,1% in 2009 and to rise by 0,2% in 2010) does not change the medium/term outlook for monetary policy. As we have explained in the post ECB and Riksbank: no exit strategy in sight we believe that an ECB’s exit strategy from the current expansionary monetary policy is far from close and that the Refi rate is likely to remain unchanged at 1% for a long time.

Riksbank leaves key rate unchanged, but Executive Board members are split over monetary policy outlook

The Riksbank left its key rate unchanged at 0.25% at today’s monetary policy meeting, as widely expected. According to the Central Bank, future developments are still uncertain, despite early signs of economic recovery and the market upturn. The Riksbank expects to begin lifting the repo rate again in the second half of 2010.

The press release published after the meeting indicated that the Executive Board members were divided on the monetary policy outlook. On the one hand, Governors Nyberg and Wickman-Parak entered reservations against growth forecasts in the Monetary Policy Update and thereby the repo rate path saying that the interest rate needed to be raised slightly earlier than expected due to improvement in financial markets and economic activity. On the other hand Governor Svensson advocated cutting the repo rate to 0 per cent and suggested that the rate should be kept at this level in the year ahead.

Given the uncertainty surrounding the economy, we believe that the Riksbank will not start raising rates and removing other expansionary monetary policy tools (i.e. negative rates for the commercial banks depositing money at the Central Bank) before other leading international Central Banks. The Bank is highly likely to hold its rate steady for a long time and well into 2010.

ECB and Riksbank: no exit strategy in sight

The ECB and Riksbank will announce tomorrow (Thursday 3 September) their monetary policy decision. Both Central Banks are expected to leave rates unchanged (at 1% and 0.25% respectively) and to adopt a wait-and-see stance. Following the encouraging economic signals coming from the French and German economy in the last few weeks (both countries saw positive GDP growth rates in Q2), the ECB will likely revise up its growth estimates for the Eurozone in 2009 and 2010. No major changes are expected for inflation projections, as the CPI development in the last few months has been in line with estimates.

However, a revision of growth estimates should not change the short/medium term monetary policy outlook. Indeed, many ECB Governing Council members are looking at the recovery under way with a lot of scepticism. As an example, ECB President Jean Claude Trichet during the Federal Reserve Bank of Kansas City's Annual Economic Symposium in Jackson Hole said that “we see some signs confirming that the real economy is starting to get out of the period of freefall, but this does not mean at all that we do not have a very bumpy road ahead of us.”

Therefore, we continue to believe that an ECB’s exit strategy from the current expansionary monetary policy is far from close. As we have indicated in the article Does the ECB really need an exit strategy? The Euro/Dollar exchange rate factor… the Taylor rule illustrates that the need to raise rates should not materialise for several quarters and our monetary condition index (MCI), which considers the real exchange rate and short-term rates trend, remains well above the long-term historical average. The MCI would worsen in the coming months should the Euro increase further and/or inflation rebound. Furthermore, a tightening role for the Eurozone economy has been played since last March by the single currency’s appreciation.

The scenario in Sweden is not that different. Having cut rates to 0.25% and introduced negative interest rates on deposits in July (commercial banks must pay 0.25% for the privilege of saving their money at the central bank), we do not see the Riksbank launch new expansionary measures at this week’s monetary policy meeting. We also believe that the Riksbank is still far from announcing an exit strategy. With the economy expected to moderate by 5.4% in 2009 and to edge up by just 1.9% in 2010, low rates are key to stimulate the economy. By contrast, higher rates would likely reinforce the Swedish Krona’s upward trend, which would weigh on exports. Pending the release of more details from the ECB and Riksbank meetings, we do believe that rates will remain unchanged until the middle of 2010 for both CBs.

September calls for a prudent asset allocation

Major international stock indices rose in August as the downward trend in the market risk premium, which began in March, continued. The expected upturn in economic activity in the months to come is the main reason for the positive equity market momentum. These expectations were reinforced in mid-August by Fed Chairman Bernanke’s statement during the Federal Reserve Bank of Kansas City's Annual Economic Symposium in Jackson Hole. Indeed, the Fed chairman, who was confirmed for a second four-year term by President Obama, said “Economic activity appears to be levelling out, both in the United States and abroad, and the prospects for a return to growth in the near term appear good”.

The last few weeks have brought a spate of forecast-beating economic data, which have strengthened expectations of an upswing in leading international economies. In the U.S., optimism has been fuelled by encouraging data from the housing sector. Reassuring signals have also come from improving consumer and business confidence indices (the ISM manufacturing exceeded the 50 threshold, which anticipates a return to growth in the manufacturing sector).

In the Euro area broadly positive news came from France and Germany. Surprisingly, both countries saw positive GDP growth rates in Q2, as clear evidence that the recession may have already ended for the two largest economies in the region. These figures also gave grounds for optimism over the whole of the Euro area economy, albeit the overall Q2 GDP figure remained in negative territory.
The possibility that the economic outlook will continue to improve in the coming months thanks to the strong monetary and fiscal stimulus implemented by the Governments and Central Banks in recent months should help lift major stock indices going forward.

A return to economic growth would bring investors to discount a sharper increase in corporate earnings in the coming quarters. A positive signal for the stock market is also the high spread between the 3-month T-Bill and the 10-year T-Bond, which has historically been followed by marked increases in U.S. indices.

For these reasons some investors are looking for sharp increases in equity markets over the coming months. According to Laszlo Birinyi of Birinyi Associates, the S&P500 may rise up to 1700 points during the next two to three years.

Nevertheless, we see many reasons to stay cautious on international indices in the short term, particularly due to seasonal factors. Indeed, September is a historically negative month for the U.S. and major international stock markets.

Moreover, following the rally staged since last March, major international stock indices do not appear to be cheap any longer. For example, the price/ average earnings for the past 10 years ratio, after plunging to 13.3x in March, its lowest since 1986, has now risen to 17x, a level in line with its long-term average.

Therefore, we recommend selecting a prudent short-term equity market asset allocation in September. This is particularly true for emerging markets indices, as shown by the steep decline in the Chinese stock market in August (the Shanghai Stock Exchange lost around 15%).

Moreover, market expectations for economic growth going forward may prove to be overly optimistic. On the one hand, some Central Banks have begun to entertain the possibility of raising rates (the Central Bank of Israel was the first CB to lift rates on 24 August, from 0.50% to 0.75%), on the other hand the Fed and ECB seem eager to wait much longer to reverse the current expansionary monetary policy as they believe that the incipient economic recovery is still fragile. Among major international central banks, the Bank of England pursued an even more aggressive expansionary policy in August by increasing its Asset Repurchase Programme. The BoE Governor, Mervyn King, suggested that a return to economic growth in line with the average of the past would not be enough to regain the ground lost in the past two years.

With major international Central Banks unlikely to reverse their expansionary monetary policy any time soon, short-term Government Bonds in both the U.S. and Euro area should continue to be a safe haven for risk-averse investors, as the chances of a steep rise in yields look slim, at least in the near future. In particular, European investors should continue to invest in European securities given the uncertainties surrounding the U.S. dollar. Risks seem to be contained even for long-term Government Bonds as fears of a strong increase in inflation as a result of the expansionary monetary policies implemented in recent years should not materialise in the months ahead.