What’s happening on the markets? In our Investment View, the experts of our Investment Division regularly provide insights of current market events and their opinion on the various asset classes.
Note: Prognoses are not a reliable indicator of future performance. Please note that an investment in securities entails risks in addition to the opportunities described.
Macro outlook
A “soft” economic landing remains the most likely scenario. However, the risks have shifted: Probability of US recession down, probability of “no landing” scenario up.
- USA: strong employment, productivity and income growth;
- China: unexpectedly broad-based stimulus measures to combat deflationary pressure.
- Eurozone: higher pace of interest rate cuts likely.
However, any of the items on the risk list could be a spoilsport for the positive sentiment on the markets: persistent inflation in the services sector, escalation in the Middle East, US elections mean uncertainty, EU-China tariff conflict over electric cars, weak manufacturing sector, EMU growth risk, much smaller scope for interest rate cuts by the Fed than expected.
Scenarios
Scenario 1 (no landing): Growth resilience and inflation persistence limit the scope for key interest rate cuts. Probability in our view: 30%
Scenario 2 (soft landing): The disinflation trend continues. In the medium term, the inflation target is reached without a recession occurring. The key interest rates in the DM can be lowered significantly. Probability in our view: 60%
Scenario 3 (hard landing): Restrictive monetary policy, restrictive fiscal policy, labor market slowdown, stagnating productivity in the EU, deflation in China, inflation persistence, geopolitics (Middle East), industrial policy (tariffs), strikes (dockworkers). Probability in our view: 30%
Asset classes
After prices fell at the beginning of the month due to concerns about the economy, the interest rate cuts by the Federal Reserve and the ECB lifted sentiment on the global equity markets. The markets were supported by China’s stimulus package. The latter one is intended to boost the economy, which has come under pressure. This also led to rising share prices in the developed markets, with the US market reaching a new all time high.
Given these developments, it’s clear that the macroeconomic landscape has shifted significantly compared to the previous month. However, our technical indicators suggest a need for a slightly more defensive approach. Therefore, we continue to underweight equities while maintaining an overweight position in high-yield bonds, which have the potential to benefit from rate cuts alongside continued positive growth. For diversification, we are keeping an allocation in gold and have also invested a portion of the portfolio into money market instruments for the time being.
Note: Portfolio positions of funds disclosed in this document are based on market developments at 20.10.2024. In the context of active management, the portfolio positions mentioned may change at any time. Please note that an investment in securities entails risks in addition to the opportunities described.
Equities
The attractiveness of equity markets has remained relatively unchanged due to positive short-term momentum, but concerns about above-average valuations and a deteriorating macroeconomic outlook persist. In October, investors are likely to focus on the third quarter reporting season. At present, the consensus for the US equity market expects earnings to grow by 3,8% in the past quarter. However, we have seen a growing number of downward earnings revisions in recent weeks.
Given the numerous risks, we are maintaining our a cautious underweight stance. We favor defensive US sectors such as essential consumer goods, healthcare, and low-volatility stocks. Additionally, the interest rate reduction cycle in Europe is supportive for European small-cap equities.
Regarding the changes in the equity allocations, we have decided to add exposure to the European energy sector at the expense of the US region, where we maintain an underweight position due to stretched valuations, particularly among large-cap companies. We believe that European energy companies may serve as a hedge against potential rising energy prices amid ongoing conflicts in the Middle East.
Government bonds
Our standings on goverenment bonds remain unchanged. As of September end, lot has been priced in and valuations seem expensive. We see longer-duration fixed income still vulnerable to a potential spike in yields.
We like emerging markets government bonds in local currencies due to their diversification effect. Lower inflation and a weaker dollar could continue to be tailwinds, along with the global central bank easing cycle.
We have maintained our neutral stance on European government bonds. Persistently weak manufacturing data strengthens the case for further rate cuts by the ECB, though we note that inflation in the services sector remains sticky.
Credit
In line with our view on government bonds, we have not adjusted our outlook on credit. Yield levels remain attractive, underpinned by strong fundamentals, with default rates expected to remain near long-term averages. The global central bank easing cycle also supports the outlook for credit.
We continue to favor high-yield over investment-grade credit, driven by its shorter duration and more appealing all-in yields. Additionally, we maintain our preference for European and Asian markets, with the latter benefiting further from recently announced Chinese stimulus measures.
Money Market
Despite the recent decline driven by ECB easing, cash continues to offer attractive yields, especially with the yield curve remaining relatively flat. It also provides liquidity, allowing us to capitalize on potential market opportunities as they emerge.
Commodities
We maintain a positive outlook on gold. The precious metal has benefited from Fed easing, and we expect real yields to decline further as growth and inflation slow. Technical factors continue to support gold, and it remains a strong hedge against geopolitical risks.
We are maintaining our neutral outlook on energy and industrial metals, as our primary reasoning remains consistent. However, we recognize that China’s announced stimulus measures may provide additional support for both industrial and energy prices.
For a glossary of technical terms, please visit this link: Fund Glossary | Erste Asset Management
Legal note:
Prognoses are no reliable indicator for future performance.