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.
Economic outlook
The reduction in yen carry trades is partly responsible for the sharp falls on the equity markets two weeks ago. The dovish statements of the Bank of Japan should lead to stabilization in the short term.
Which growth scenario is most likely?
A soft landing of the economy is currently the most likely scenario. However, the latest growth indicators have disappointed (global manufacturing PMI, US unemployment rate). Recession risks have increased.
Inflation persistence or further decline in inflation?
Most-likely: Inflation decline. The latest inflation rates in the US and the eurozone have fallen month on month.
Hawkish or mild central banks: interest rate cuts that are too late or too low could trigger a recession. This would most likely lead to significant rate cuts.
Scenarios:
Scenario 1 (no landing): Growth resilience and inflation persistence limit the scope for key interest rate cuts. Probability in our view: 10%
Scenario 2 (soft landing): The disinflation trend continues. The inflation target is reached in the medium term. The key interest rates in the DM can be lowered significantly. Probability in our view: 60%
Scenario 3 (hard landing): The monetary policy environment remains restrictive for too long. Lending guidelines are restrictive and the debt burden increases. The expectations of key interest rate cuts priced into the market increase, but can no longer stop a recession. Probability in our view: 30%
Asset classes
The first few days of August saw a pronounced ‘summer slump’ in the stock markets, with share prices experiencing notable declines. What began as a sharp drop on the Tokyo Stock Exchange quickly spread to European and US markets, erasing much of the gains achieved in recent months. In June, we had already anticipated increased fluctuations in both equity and bond markets.
Our portfolio remains broadly diversified with a continued focus on quality, which should help to cushion some of the market volatility, though not entirely eliminate it. In the light of this heightened volatility, we have decided to adopt a more cautious stance in the near term. Accordingly, we have slightly reduced our equity exposure and set aside capital to be ready for future opportunities into money market.
Note: Portfolio positions of funds disclosed in this document are based on market developments at 19.8.2024. 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 appeal of equity markets has waned due to declining momentum and a deteriorating macroeconomic outlook, therefore we decided to underweight equities in our portfolio. Weaker-than-expected US labour market data, combined with persistent economic weakness in Europe, has reignited recession fears. If the US economy loses momentum, it will be challenging for markets to sustain higher stock prices. The Q2 earnings season is currently in full swing, with overall earnings growth quite solid at around 11%. However, some companies, particularly in the US technology sector, have fallen short of high expectations.
From a style and sector perspective, we have shifted towards a more defensive equity exposure, adding sectors such as healthcare and consumer staples in the last few months. This month, we also included low-volatility equities from the US. Low-volatility equities tend to offer a smoother ride within equity allocations, reducing overall market swings. In the light of increased uncertainty in equity markets, this strategy helps lower overall risk while keeping us invested.
Regionally, we maintain our existing allocation, with an underweight in the US and a neutral stance in value-oriented regions like the UK, Europe, and Japan. We continue to favour emerging markets, particularly in Latin America. However, we have reduced our overweight position in the EMEA region due to escalating conflicts in the Middle East, adopting a more neutral stance.
Government bonds
The prospect of falling interest rates has already influenced capital markets, leading to a significant decrease in yields on longer-dated government bonds. In our view, this move has been somewhat overexaggerated. As a result, we have decided not to increase our position in these assets at this time and maintain our overall negative outlook.
We maintain our neutral allocation to European government bonds and continue to prefer emerging market government bonds, particularly those denominated in local currencies.
Credit
We are maintaining our current allocation in credit for the time being, with a preference for high-yield corporate bonds. We believe that the combination of shorter duration and attractive all-in yields will compensate for potential spread widening if base yields on government bonds decrease. Our exposure to high-yield corporate bonds comes at the expense of investment-grade corporate bonds, where we hold only a modest position, primarily in European IG corporate bonds.
We particularly favour high-yield corporate bonds from Europe and Asia, where financial conditions are already beginning to ease. The European Central Bank delivered its first rate cut in June, and in Asia, China provided additional economic support with surprise interest rate cuts at the end of July. The lower yield environment is advantageous for issuers, reducing the cost of borrowing in debt markets.
Money Market
Proceeds from our underweight position in equities have been allocated to money market instruments. We find the current yield levels at the short end of the curve attractive and have set aside capital to be ready for future opportunities.
Commodities
Gold has remained within a higher trading range of USD 2,300 – 2,500 for around four months. Although a technical breakout has not occurred, the stronger dollar has been a headwind. Nonetheless, demand remains robust, particularly from non-financial investors and non-Western countries. At the portfolio level, gold continues to be attractive, and we maintain our overweight position in this precious metal.
Our stance on energy and industrial commodities remains neutral. The ongoing slowdown in economic growth, particularly in China, continues to dampen demand. However, OPEC’s voluntary production cuts are providing support for oil prices, and the long-term trend towards green energy transition is favourable for industrial metals.
For a glossary of technical terms, please visit this link: Fund Glossary | Erste Asset Management