Is something brewing?
Market update by Karin Kunrath, Chief Investment Officer of Raiffeisen KAG
The current "reality check" as part of the reporting season on company results in the second quarter is also rather sobering, especially as the rate of positive surprises is lower than in recent quarters and individual shares are being brutally sold off after disappointing figures.
The entire mix of factors has caused the previous "goldilocks" scenario, which describes the best of all worlds in combination with solid corporate results, stable growth and low inflation, to quickly evaporate. On the stock market, the recent increase in volatility, the significant sector rotations and the change in favourites may already have been signs of a changed narrative. The significant sell-off of risky assets as a result of weaker US industrial and labour market data confirms the fragile environment.
The statistically weakest months on the stock markets, August and September, coincide with these current developments, which call for caution. In any case, it remains to be seen whether the economic data will not only be increasingly negative in relation to expectations and thus tend towards recession, or whether a "soft landing" and thus a relaunch of the economy can succeed with the help of the now all the more expected interest rate cuts by the central banks.
The annual central bank meeting in Jackson Hole (USA) and the rest of the reporting season are also expected to provide significant impetus in August. In addition, an escalation in the geopolitical conflicts could cause further uncertainty on the markets.
We took price gains at the beginning of July - near the peak of the equity market - and at the same time bought bonds at a low level with attractive yields.
Overview of asset classes
Government bonds: Yields on European government bonds could fall further
Yields on low-risk government bonds fell again in July. However, risk premiums on peripheral European bonds (including France) have not yet fallen. We expect European government bond yields to continue to fall, but assume that higher-risk government bonds (France, Italy) will perform even better.
Corporate bonds: Risk premiums on high-yield bonds have risen further
High-risk bonds (high-yield bonds) remain less in demand than at the beginning of the year. Risk premiums on high-yield bonds rose again in July. In contrast, investment-grade corporate bonds continued to hold their own with historically low spreads. As long as there are no signs of a global economic slowdown, we will remain invested in IG corporate bonds (spread risk) but are cautious about high-yield spread risks. Although we have recently seen weaker labour market data, among other things, we believe it is still too early to completely avoid investment grade spread risks.
Emerging markets: weaker data from China has a negative impact
Emerging market hard currency bonds have recently been unable to keep pace with the decline in yields on US government bonds, and their risk premiums have risen accordingly. Weaker data from China and geopolitical risks with enormous potential for escalation (Israel/Iran, etc.) have had a negative impact. We are maintaining our positions in hard currency emerging market bonds for the time being, as we continue to see a good risk/return profile here.
Developed equity markets: Consolidation on international equity markets
There has been consolidation on the international stock markets in recent weeks. The majority of economic data has been weaker in recent weeks, while the reporting season for the second quarter has got off to a good start. Following the very strong price performance since the beginning of the year and a simultaneous slowdown in economic momentum, the risk of price setbacks is increasing. We are therefore maintaining our neutral positioning after reducing our equity overweight at the beginning of July.
Emerging equity markets: significant correction
Emerging market equities have also corrected significantly in recent weeks in line with the developed markets. The basic materials and property sectors have been particularly weak. The utilities sector stands out positively. The earnings momentum of companies must still be described as meagre. Valuations vary greatly from region to region, which is also due to the sector structure of the different markets. Nevertheless, improved profits are necessary for share prices to rise, but these have yet to materialise.
Commodity markets: price declines for cyclical industrial metals
The international commodity markets have been somewhat weaker in recent weeks. Cyclical industrial metals and the energy sector in particular recorded price declines. Weaker economic data points to a more subdued demand picture. By contrast, the precious metals sector benefited from expectations of a further fall in key interest rates and a decline in yields.