Financial Markets Monitor September – conclusion: cautiously optimistic

We held our monthly Investment Committee meeting at the beginning of September. Since the previous meeting at the beginning of August, where the assessment of the financial markets had been largely optimistic, equities in particular had had a mixed run. While the USA (in EUR) was up, Europe and the emerging markets (in EUR) had recorded a decline. The optimistic risk stance of the team had therefore only paid off in parts. Against this backdrop, we remain generally optimistic as a group in September although we have become slightly more cautious with our assessment. More specifically, our risk stance decreased from 75% to 70%. This level, however, continues to signal the willingness to assume risk. This means that we still prefer risky asset classes like equities or corporate bonds.

Number or risks picking up at the horizon

The change in the opinions held by the team members that had been noticeable throughout previous months has thus left its first tangible imprint this month. Whereas almost all committee members had been optimistic up until summer, the spectrum of opinions is now much more diverse. While many team members stick to their optimistic basic stance, the number of those who can see risks forming at the horizon and have thus assumed a neutral position has increased in the past months. Interestingly, we now also have a group member who holds a risk-averse stance. Overall, our current aggregate risk stance is therefore cautiously optimistic.

Strong growth with downside risks

Gerhard Winzer, Chief Economist of Erste Asset Management, expects four factors to affect the state of the global financial markets in the coming months:

• Gradual weakening of the still strong global economic growth. Here, the focus is on China and the other emerging economies
• Increase in inflation, especially in the USA
• Interest rate hike in the USA and stimulus package in China
• Deteriorating trade conflict between the USA and China

Overall, global growth is currently strong but comes with numerous downside risks.

Growth shares with advantage

Our factor analysis models are pretty much in line with the aforementioned scenario. In the past weeks, the growth, quality, and small caps segments have been positive, whereas value, high-dividend, and minimum volatility have been generally under pressure. At the same time, we have seen a first weakening in the dynamics of small caps and momentum equities.

This suggests that investors basically maintain the premise of a robust economic environment, which is why there is little demand for more defensive market segments. At the same time, the existing downside risks (China, emerging markets, trade conflicts) have been priced into the performance of more aggressive investment styles.

The biggest risk is global protectionism

Like every month, the members of the Investment Committee rated the existing global risks by probability of occurrence and by impact on the financial markets. The resulting risk matrix suggests that the biggest risk (both in terms of probability and of impact) is associated with the increase in global protectionism. A possible government debt crisis in the emerging economies is regarded as equally serious. These two are followed by a possible correction of the equity markets, in some part due to the current valuations, and by a global economic decline.

The US debt ceiling, the succession plan in the ECB, and sanctions against Iran should hold a lower degree of risk.

Conclusion:

From our point of view, the immediate outlook for the global financial markets is basically positive. In particular, the macroeconomic environment in the developed economies is largely sound. There are downside risks such as an excessive decline in Chinese growth or potential crises in the emerging economies. As long as the underlying investor sentiment remains positive and investor confidence does not tilt, we are optimistic about the autumn on the capital markets.

 

Legal note:

Prognoses are no reliable indicator for future performance.

 

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