Capital market commentary
Karin Kunrath, Chief Investment Officer of Raiffeisen KAG
A super election year, geopolitical flashpoints or the threat of recession, to name just a few buzzwords, would all have had the potential to have a significant negative impact on capital market developments this year, or at least to cause a sharp temporary increase in volatility.
In addition, market participants had to weigh up and process the uncertainty regarding central banks and interest rate policy, the low market breadth and the high dependence on the largest US growth stocks ("Magnificent 7"), as well as partially interrupted supply chains in global trade and a possible explosion in oil prices due to the escalation in the Middle East conflict.
But despite all these potential dangers, 2024 has been an extraordinarily good year for the capital markets so far, especially for risky asset classes. The reasons for this are probably, on the one hand, the very positive development in US corporate earnings and, on the other hand, the fact that US economic growth has also consistently surprised on the upside to date. In addition, most central banks have actually started to reverse interest rates during the course of the year as a result of falling inflation. It is worth noting that the Fed's first interest rate cut in September, by a considerable 50 basis points, took place in the context of strong economic growth and a still robust labour market in the US, and thus was not triggered by the onset of a recession.
The outcome and consequences of the US election have been the most closely watched political event risk this year and have caused increased volatility in the financial markets in the run-up to the election. The pronounced price movements in the wake of the surprisingly clear election result – particularly on the US stock market – can probably be attributed above all to the fact that an element of uncertainty has initially been removed. However, it remains to be seen whether, when and to what extent the economic policy measures announced by Donald Trump during the election campaign will actually become reality.
Overview of asset classes
Government bonds
Government bonds with lower yields in the medium term
After a temporary rise in yields on euro government bonds, we expect lower yields in the medium term and have a positive view of this bond class. We are positioning ourselves not only in the direction of falling German government bond yields, but also in anticipation of falling risk premiums for Italian and French government bonds relative to German government bonds. We are less positive on US and Canadian government bonds. This is because we expect stronger yield declines in the euro market than overseas, where the economic situation is noticeably better.
Corporate bonds
Vulnerability to corrections could increase
We remain moderately positive with regard to EUR investment grade corporate bonds. The credit spreads of EUR high-yield and investment grade corporate bonds continue to trade close to their lows and are therefore likely to be more susceptible to corrections. The debt service ratios of the corporate sector remain very solid. We maintain our more cautious positioning.
Emerging markets bonds
China is comparatively weaker
The risk premiums of emerging market hard currency bonds have recently fallen further. We continue to consider this bond class as attractive relative to other spread assets and have positioned ourselves accordingly. Within the emerging markets, China in particular appears on the weak side relative to other Asian emerging markets. Economic indicators have recently been published well below expectations (exports, PMIs, etc.). However, this also suggests that further government stimulus measures are on the way.
Developed equity markets
Developed equity markets remain firm
The international equity markets have remained very firm in recent weeks. Continued good earnings growth has provided support in recent months. Most recently, Donald Trump's victory has also given a boost to the US equity market in particular. Nevertheless, our indicators currently show a very mixed picture, so we are maintaining our neutral stance for the time being.
Emerging equity markets
Trump presidency still an unknown variable
After emerging market equities were recently very much characterised by the strong performance of Chinese equities, which then entered into a short-lived consolidation, the question now is how this region of the world will deal with a Trump presidency. Companies in the manufacturing sector, in particular, could be severely affected by a return to protectionist trade policies. It will therefore be all the more important to see in the coming weeks how Trump's statements following his election are substantiated.
Commodity markets
Precious metals continue to rise
The international commodity markets presented a mixed picture in recent weeks. Prices of cyclical industrial metals fell again, and energy commodities were also weaker. Precious metals rose again despite higher yields. We currently hold no position in the commodities asset class as part of our tactical asset allocation.