Market update by Karin Kunrath, Chief Investment Officer of Raiffeisen KAG
„Mid-year review”
The equity market was also boosted by the continuation of the turnaround in corporate earnings across a broad front, the subsequent positive analyst revisions to earnings estimates in all market regions, the still very high levels of operating margins and, last but not least, the prospect of interest rate cuts over the course of the year.
The capital market's relaxed attitude to date is surprising, considering the numerous geopolitical crises and their effects such as disrupted supply chains in global trade, increased freight rates and raw materials due to higher risk premiums, more difficult import and export framework conditions as a result of tariffs and other economic policy restrictions.
The performance of government bonds must be seen as sobering, especially as the decline in yields expected by many in anticipation of interest rate cuts has not yet materialized. The result has not been falling, but even rising bond yields. Despite all the negative factors, global economic data has actually brightened noticeably in recent months and the likelihood of recession has been significantly reduced. The fact that inflation rates are still at excessive levels, but have not yet actually slowed down the global economy either directly via prices or indirectly via interest rates, means that central banks are still reluctant to cut key interest rates was probably not expected.
We are now seeing a certain gloominess in the macro data, while the equity market has recently been rushing from high to high. Sentiment now appears exaggerated and is therefore a contra-indicator of a certain cooling in the foreseeable future.
Overview of asset classes
French government bonds with sharp spread increases
Yields on low-risk government bonds fell slightly in June, while French government bonds saw a sharp rise in spreads. Overall, European peripheral bonds lagged behind low-risk German government bonds. Although we expect European government bond yields to fall, we assume that riskier government bonds, such as French or Italian bonds, will perform even better.
Corporate bonds benefited from expected economic growth
Euro corporate bonds recorded slight spread increases in June. This is probably due to the fact that French companies and banks dominate the EUR corporate bond market the most (approx. 21.5% weighting) and the spreads of French government bonds had risen sharply. In our opinion, however, corporate bonds should remain in demand. This bond class benefits from low but positive expected economic growth and thus an environment in which neither high-risk growth plans are being rolled out by top management nor a recession that is detrimental to earnings.
Emerging markets: comparatively good economic momentum
Overall, the emerging market countries are showing comparatively good economic momentum, albeit less convincing than we expected. Relative to other spread assets, we currently see emerging market bond spreads as having the best risk/return profile.
Developed equity markets: risk of temporary price setbacks increases
The international equity markets have remained very firm in recent weeks. The majority of economic data has been weaker in recent weeks. The sentiment indicators show a very positive picture and, in combination with the strong price increases since the beginning of the year, this also increases the risk of temporary price setbacks.
Emerging equity markets: absolute performance remains positive
After emerging market equities outperformed developed market equities for a long time in April, particularly due to the strong movement in Chinese equities, they have now fallen back again in relative terms. Nevertheless, the absolute trend remains positive, and we expect this to continue in the coming months as we anticipate a further recovery in corporate earnings.
Commodity markets: precious metals remain very firm
The international commodity markets have trended sideways in recent weeks. Weaker economic data points to subdued demand. The precious metals sector remains very firm in view of the recent rise in real yields.