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

Global growth is at potential. The growth drivers are more broadly based: Slight slowdown in the USA, return to growth in Europe. On the inflation side, the downward trend of the past year has not continued at the same pace since the beginning of the year. The resilience of growth and the persistence of inflation are reducing the scope for key interest rate cuts. The financial environment nevertheless remains constructive.

Hawkish or dovish central banks? Cutting interest rates too early or too much could trigger a second wave of inflation and asset price bubbles as well as subsequent interest rate hikes. Cutting rates too late or too little could unduly weaken economic activity (trigger a recession). Most likely: hawkish.

Scenarios:

1. No landing: Growth resilience and inflation persistence limit the scope for key interest rate cuts. Probability in our opinion: 60%

2. Soft landing: The disinflation trend continues. The inflation target is reached in the medium term. The key interest rates in the developed markets can be lowered significantly. Probability in our opinion: 20%

2. Hard landing: The monetary policy environment remains restrictive for too long. Lending guidelines are tightened further and the debt burden increases. The key interest rate cut expectations priced into the market decline further. This would worsen the financial environment (financial conditions). In the event of an acceleration in inflation, central banks could even come under pressure to raise key interest rates. Probability in our opinion: 20%

Asset classes

In alignment with the overall economic landscape, we maintain our dynamic positioning. Potential volatility over the summer months, often due to lower liquidity, is not a concern given the economic situation.

Our equity allocation remains neutral, and our bond positioning prefers the high-yield segment. To maintain portfolio balance, we are increasing allocations in European high-yield corporate bonds and European government bonds (only in some of our portfolios) at the expense of the money market, resulting in a slight increase in portfolio duration. The portfolio remains dynamic yet broadly diversified.

Note: Portfolio positions of funds disclosed in this document are based on market developments at 1.7.2024. 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 robust state of the US economy, positive earnings revisions from the Q1 reporting season, and decreased concerns over bond yields created a favourable equity environment in May. Consequently, we maintain a neutral weighting on equities, with no changes to our allocation.

We acknowledge that current equity pricing calls for a cautious stance, as many indices are reaching new all-time highs. Therefore, we prefer a neutral position across most regions. Our strategy includes an overweight position in EMEA and Latin America, balanced by reduced exposure to Asia ex-Japan, where we see less potential for growth. Overall, we maintain a neutral allocation to emerging markets.

From a sector perspective, we have one active bet: the US health care sector. We find the defensive attributes of the health-care sector appealing, making it a strong prospect across various market scenarios.

Government bonds

Yields have slightly decreased in May due to weaker-than-expected economic growth in the USA and inflation figures aligned with forecasts. The market environment is now more balanced, thanks to recent central bank actions and statements. Interest rate expectations and economic outlook are the primary factors driving  yields currently. However, geopolitical events and upcoming elections could also impact the market, such as President Macron’s unexpected call for early elections.

With the ECB June rate cut already deal done, future rate movements are less predictable and will heavily depend on the incoming data. Economic growth in Europe is picking up after five quarters of stagnation, as well indicated by improving PMIs. However, overall economic activity remains relatively subdued. We have slightly increased our positions in European government bonds, particularly in portfolios where money market allocations were significant.

Credit

In June, we increased our allocation to credit, particularly European high-yield bonds, at the expense of money market instruments. Several factors support this decision:

• Despite spreads have compressed due to rising rates, yields remaining around 6.75% since December, providing portfolio stability.
• Demand remains robust, and net supply is constrained.
• Resilience: Although default rates may stay slightly elevated due to a sizeable distressed cohort, access to capital help mitigate these risks.
• The European economy is experiencing a cyclical upswing, which supports solid credit metrics. Corporate earnings growth is helping to offset rising interest expenses.

Overall, within the credit sector, we prefer European and Asian high-yield bonds over investment-grade bonds. This preference stems from their shorter duration, attractive all-in yields, favourable fundamentals and technical indicators, such as strong momentum.

Money Market

In June, we closed our overweight position in money market instruments, adopting a negative stance. As the ECB begins its rate cut cycle, money markets lose appeal due to lower interest-bearing potential.

Commodities

Gold briefly exceeded USD 2.400 before consolidating around USD 2.300. Due to its role as a portfolio diversifier, we overweight gold. Our stance on energy and industrial metals remains neutral. OPEC+ has reduced its production quota discipline. However, varying break-even prices among OPEC+ countries influence production levels, putting pressure on crude oil prices. Solid global economic growth should prevent a significant collapse in demand.

For a glossary of technical terms, please visit this link: Fund Glossary | Erste Asset Management