Capital markets

Bonds

As far as the monetary policy that can be expected from central banks in 2011 is concerned, we anticipate increased vigilance. In our assessment, central banks will be ready for a tightening of monetary policy in order to be able to respond at short notice as needed and set in motion steps to reduce the surplus liquidity. Interest rate increases at the short end of the curve are, however, not expected from the Fed or the ECB for the time being. The question of how long central banks will keep interest rates on the current low level and continue to pursue their expansionary monetary policy cannot, as things presently stand, be answered. Decision-makers must, however, be made aware that a continuation of this monetary policy – which has undoubtedly played its part in helping to cope with the consequences of the worldwide financial and economic crisis – entails considerable interest rate losses on new investments made by the insurance industry and makes it increasingly difficult for insurance enterprises to generate sustainable surpluses. Inflation expectations in the Eurozone are likely to remain moderate, although they are the subject of heated discussion – including within the ECB. The inflation risks for the United States and United Kingdom are assessed as slightly higher than for the Eurozone.

In 2011 the focus will continue to be on the sovereign debt crisis affecting countries on the Eurozone periphery. Since the funding requirements of these countries are high, further volatility can be expected – depending on the latest news to emerge. Overall, the picture remains very mixed. In the banking sector, too, there is a considerable need for refinancing. When possible, banks will likely switch to issuing covered bonds. The more exacting capital requirements of Basel III will also keep the banks busy in 2011. The quest for returns, combined with the large issue volume of government bonds anticipated for 2011, will cause ten-year yields on government bonds to rise. In this climate the interest curve should initially become even steeper, before discussions about hiking key interest rates can bring about flattening as this year progresses. We continue to anticipate a stable development overall on the corporate bond markets, allowing for short-term news-driven volatility. For 2012, too, we expect interest rates to move higher on the back of the anticipated steps in monetary policy.

Equities

Boosted by the ongoing economic upturn, it is our belief that equity markets will again deliver positive returns in 2011. The fundamental valuation is below the long-term average yields, making equities still appear a favorable proposition. Dividend yields are also relatively high and will sup-port the performance of equities accordingly. An intact profit trend among companies is adding to the positive mood. In our assessment, the M&A cycle is only in its initial phase and will have positive effects in 2011. Companies have sufficient cash at their disposal and can obtain refinancing on reasonable terms in the present low interest rate environment. The considerable supply of liquidity that central banks continue to provide points to increased cash inflows into equity markets. Companies which are heavily exposed in growth regions are likely to fare especially well in 2011. Analysts’ earnings estimates for 2011 are, however, already very positive and higher than the pre-crisis level. These high expectations are increasingly opening up a certain potential for disappointment. As a consequence of the slowing pace of economic growth the increase in corporate profits forecast for 2012 will not be as vigorous as that anticipated in 2011. Based on diminishing earnings growth, we expect an average return by the standards of this asset class.