Erste Asset Management

Investment Update: First steps to interest rate hikes and volatility in the stock markets

Investment Update: First steps to interest rate hikes and volatility in the  stock markets
Investment Update: First steps to interest rate hikes and volatility in the stock markets
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Stocks posted significant gains Wednesday after Federal Reserve Chairman Jerome Powell signaled that the central bank would begin raising interest rates this month. The first rate hike will likely be followed by a series of increases of 25 basis points each. The Fed’s goal is to bring inflation back toward its 2% target while being “prudent” and maintaining economic growth. Powell pointed out that the impact of the war in Ukraine on the U.S. economy is highly uncertain.

Stock markets interpreted this as a positive signal in the sense that the threat to growth posed by the war in Ukraine did not warrant a change of course in monetary policy at this time. Conversely to the previous day, the U.S. benchmark index S&P 500 rose by 1.9%, while the EuroStoxx 600 closed 0.9% higher. The gains continued in today’s Asian trading session, with Japan’s Nikkei 225 posting gains of 0.7%.

Government bonds gave back some of their gains from the previous day. The yield on 10-year U.S. Treasury bonds rose by 15 basis points to 1.86%. The markets thus again expect about six interest rate hikes this year in the US. Market reaction was similar in Europe, where 10-year German government bond yields rose 10bps.

Crude oil prices continued to rise and currently stand at USD 118 per barrel. This was also helped by the US government’s announcement that it was open to imposing sanctions on Russian oil and gas.

How will we position ourselves in the funds?

We expect the volatility in the markets caused by the Ukraine crisis to persist in the coming weeks, meaning that the market environment will remain rough. From today’s perspective, our assessment of the key factors in the base case scenario is as follows:

Economy: From a macroeconomic perspective, we expect the global economic recovery scenario to continue in 2022. However, due to the sanctions imposed by the West and counter-sanctions from the Russian side, growth will be weaker than forecast at the beginning of the year. This results in part from the increased costs of energy and agricultural raw materials, which act as an additional tax burden for consumers and companies.

Inflation: This will also keep inflation at an elevated level for longer than assumed before the Ukraine crisis. Nevertheless, a decline in inflation by the end of the year seems likely from today’s perspective.

Monetary policy: We expect central banks at global level to implement their restrictive interest rate policy in a more moderate form than assumed at the beginning of the year.

Valuations: Due to the price declines in high-opportunity investments since the beginning of the year, their valuations now appear more attractive. Valuation ratios for global equities are more favorable than at the beginning of the year, as are credit spreads for corporate bonds.

Technical factors: Sentiment or sentiment in the market, on the other hand, has deteriorated, as have several technical indicators.

The above factors are still supportive of opportunity investing in the medium term. Nevertheless, risks have increased, stemming from the military action, sanctions and counter-sanctions around Ukraine.

Therefore, we will leave the risk appetite of our funds and portfolios at the now reduced level we implemented this week. This also applies to the equity quota. In our other high-opportunity investments, we will continue to invest very broadly across asset classes, regions and sectors. This includes, for example, high yield bonds from the USA and Europe (with a focus on the USA). We will maintain our diversifying investments in gold, U.S. government bonds, U.S. mortgage bonds and near-money market investments.

In addition, we will add further diversifying assets to the portfolios and funds. On the one hand, these include European government bonds, which have proven to be a safe haven this week. On the other hand, we will increase our gold allocation via broadly diversified commodity funds and include industrial metals and energy. Energy commodities could benefit in the event of a further escalation of the crisis and sanctions against Russian oil and gas supplies.

Legal note:
Prognoses are no reliable indicator for future performance.


Legal disclaimer

This document is an advertisement. Unless indicated otherwise, source: Erste Asset Management GmbH. Our languages of communication are German and English.

The prospectus for UCITS (including any amendments) is published in accordance with the provisions of the InvFG 2011 in the currently amended version. Information for Investors pursuant to § 21 AIFMG is prepared for the alternative investment funds (AIF) administered by Erste Asset Management GmbH pursuant to the provisions of the AIFMG in connection with the InvFG 2011. The fund prospectus, Information for Investors pursuant to § 21 AIFMG, and the Key Information Document can be viewed in their latest versions at the web site within the section mandatory publications or obtained in their latest versions free of charge from the domicile of the management company and the domicile of the custodian bank. The exact date of the most recent publication of the fund prospectus, the languages in which the Key Information Document is available, and any additional locations where the documents can be obtained can be viewed on the web site A summary of investor rights is available in German and English on the website as well as at the domicile of the management company.

The management company can decide to revoke the arrangements it has made for the distribution of unit certificates abroad, taking into account the regulatory requirements.

Detailed information on the risks potentially associated with the investment can be found in the fund prospectus or Information for investors pursuant to § 21 AIFMG of the respective fund. If the fund currency is a currency other than the investor's home currency, changes in the corresponding exchange rate may have a positive or negative impact on the value of his investment and the amount of the costs incurred in the fund - converted into his home currency.

Our analyses and conclusions are general in nature and do not take into account the individual needs of our investors in terms of earnings, taxation, and risk appetite. Past performance is not a reliable indicator of the future performance of a fund.

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