The European Central Bank’s (ECB) president Mario Draghi’s pledge at the July 2012 Global Investment Conference in London, to “do whatever it takes to save the euro” and the subsequent unveiling of the plan for Outright Monetary Transactions (OMTs) headed off a surge in Spanish and Italian government borrowing costs. Capital markets interpreted the speech as the prevention of some form of eurozone break-up in 2012. The decreasing government bond rates in southern European economies can be seen with a change in the liquidity risk premium. Investors which require a high degree of liquidity have moved back into government bonds and are prepared to pay a significant price (in terms of low yields) for investing in the most liquid assets. Despite the ECB’s announcements and the implementation of structural reforms by several eurozone countries the eurozone economy experienced a further slowdown in 2H12. Austerity programs are expected to continue weighting on economic growth in 2013 and 2014. On the positive side, the eurozone economy may move out of recession and grow by 0.1% in 2013. But with the low growth economic environment this may not have any positive effect on the labor market. Therefore, we expect a subdued real estate market for the next couple of years. Elections in Italy and Germany but also the willingness of the French government to implement structural reforms are expected to influence investor and consumer confidence in 2013. The continued weakness of the eurozone banking sector but also the implementation of new regulation limits their ability to provide debt to the real estate sector.
Source : UBS AG