Market commentary: What will the second half of 2024 bring?

The first half of 2024 has thrown up a few surprises: At the beginning of the year, the markets were still expecting inflation rates to fall significantly and interest rates to fall accordingly. In fact, the central banks managed to get inflation more or less under control – although we are not yet at the desired target level of 2% is still (but hopefully we will be soon).

At the same time, yields on the capital market have risen significantly: 10-year US Treasury bonds now yield 4.4% p.a. (at the start of the year, the yield was below 3.9% p.a.) and 10Y German government bonds, which were yielding just under 2.0% p.a. at the start of the year, are now yielding almost 2.6% p.a., this despite a cut in the key-lending rates by the European Central Bank.

Note: Past performance is not a reliable indicator of future performance.

Political changes and greater fluctuations

In any case, a few “new“ faces in politics. And thus, probably also some surprises. We therefore expect greater fluctuations on the equity and bond markets in the coming months – but these fluctuations should not overshadow the longer-term view, in line with the motto “political equity markets have short legs“. The medium and long-term outlook remains positive:

The global economy should continue to grow and provide companies with rising profits. Double-digit profit growth rates are forecast for US companies over the next few years. And European companies should – according to the analysts’ assessment – also be able to record significantly rising profits in the medium term. (Note: Prognoses are not a reliable indicator of future development. Please note that investments in securities entail risks in addition to the opportunities described.)

Stable labour market

The positive environment is due to a stable labour market on the one hand and falling inflation rates on the other. Thanks to the wage increases of recent years, households can now once again report real wage growth after years of real wage losses, which is likely to flow largely into consumption and thus support economic growth, particularly in the USA. Here is a brief summary of the last few years:

#Above-inflation wage increases are generating additional income in real terms, but at the same time, inflation, at least in the USA, remains well above the Fed’s 2% target. The US Federal Reserve is therefore forced to keep interest rates higher than many experts expected at the beginning of the year. High interest rates lead to higher financing costs, and therefore less investment, less consumption and, as a result, falling prices in the medium term.

The first signs of a slowdown in economic growth are already making themselves felt. This means that inflation in the USA, as in Europe, should continue to fall, thereby increasing the scope for the US Fed to lower interest rates, prevent a recession, and support the economy and labour market.

“Soft landing” possible

Lower interest rates mean more and cheaper investments, more consumption, and as a result more jobs and a growing economy. A cycle that – if it works as it usually does – ensures stable markets and a positive capital market environment. There are signs that the central banks are succeeding in supporting a “soft landing“ of the economy.

Positioning for the second half of the year: broadly diversified and balanced

When positioning the portfolio, it makes sense – even in anticipation of stronger fluctuations – not to lose sight of the long-term goal: Asset accumulation and value growth. Our research shows how important a broadly diversified and balanced portfolio is in order to achieve this goal.

If the equity markets do not perform as planned, it can be helpful to be able to fall back on bonds to finance upcoming investments. Who wants to have to sell shares at their low? And if a conflict breaks out again in one corner of the world, a gold investment can literally make the portfolio shine again, despite otherwise dismal performance. Many investors who have complained about galloping real estate prices in recent years and have missed favourable buying opportunities could perhaps use the current slack period in the market to make a purchase or two? (Note: Please not that an investment in securities entails risks in addition to the opportunities described.)

In the past 20 years, the global equity markets (measured against a broad international index, in euro, as of the end of 06/2024) have increased in value by almost 9% per annum. A small comparison shows how important the focus on quality is here: a US company with a certain penchant for smart apples managed to gain an average of 36% p.a. over these 20 years. A Finnish company that was also very hyped in the past – funnily enough, a product line that entered the market at the end of the 1990s was also strongly associated with fruit, in this case a banana – was unable to achieve this success and posted a significantly negative performance of -3% p.a.

Note: Please note that past performance is not a reliable indicator of future value development.

So, while equities have gained around 9% p.a. on average over the last 20 years, Eurozone government bonds – probably also thanks to a long phase of zero interest rates – only recorded an average of +3% p.a. and gold gained 10% p.a., probably also thanks to very volatile price phases and recent highs.

Positive development in the short and medium term

In the long term, this trend should continue. In the short and medium term, we are positive about the economic development from here on out. The central banks have the necessary tools to have both a supportive and restrictive effect and can use their tools to stabilise price trends. In the medium term, it should be possible to achieve the desired target level of 2%. A few interest rate cuts in the coming months should help to support the stable economic growth path.

We are therefore starting the second half of the year almost unchanged: a strong focus on equities; investments in bonds with good credit ratings (government and corporate bonds); high-yield bonds mixed in, as well as real estate and alternative investments such as gold and hedge funds will strengthen the portfolio’s degree of diversification and increase the chance of achieving some stability in the portfolio even in times of stronger fluctuations.

Note: Please note that past performance is not a reliable indicator of future value development and that investing in securities involves risks as well as opportunities.

Notes ERSTE OPPORTUNITIES MIX

The fund employs an active investment policy and is not oriented towards a benchmark. The assets are selected on a discretionary basis and the scope of discretion of the management company is not limited. Please note that investing in securities also involves risks besides the opportunities described.

For further information on the sustainable focus of ERSTE OPPORTUNITIES MIX as well as on the disclosures in accordance with the Disclosure Regulation (Regulation (EU) 2019/2088) and the Taxonomy Regulation (Regulation (EU) 2020/852), please refer to the current Prospectus, section 12 and the Annex “Sustainability Principles”. In deciding to invest in ERSTE OPPORTUNITIES MIX, consideration should be given to any characteristics or objectives of the ERSTE OPPORTUNITIES MIX as described in the Fund Documents.

Advantages for the investor

• Participation in global, future-oriented themes
• Investment in an actively managed portfolio of equities, bonds, listed private markets, commodities and currencies.
• Risk diversification across several countries, sectors and asset classes

Risks to be considered

• Investments in capital markets are subject to market price fluctuations.
• An investment in the mentioned themes can also develop negative, a loss of capital is possible.
• Due to the investment in foreign currencies, the fund value may be negatively impacted by changes in exchange rates.
• Risks that may be of significance for the fund are in particular: credit and counterparty risk, liquidity risk, custody risk, derivative risk and operational risk. Comprehensive information on the risks of the fund can be found in the prospectus and the information for investors pursuant to Section 21 AIFMG, Section II, chapter “Risk information”.

NOTES ERSTE REAL ASSETS

The fund employs an active investment policy and is not oriented towards a benchmark. The assets are selected on a discretionary basis and the scope of discretion of the management company is not limited. Please note that investing in securities also involves risks besides the opportunities described.

Advantages for the investor

• Investment focus on real assets
• Opportunity to achieve long term capital appreciation
• The broad investment in a vast array of assets allows for a significant degree of risk diversification in the fund, which may reduce the risk of capital losses.
• Investment funds are separate assets

Risks to be considered

• The assets in the fund may be subject to considerable price fluctuations.
• Due to investments denominated in foreign currencies, the net asset value of the fund can be negatively impacted by currency fluctuations.
• Alternative investments involve a higher level of risk
• Capital loss is possible
• Risks that may be significant for the fund are in particular: credit and counterparty risk, liquidity risk, custody risk, derivative risk and operational risk. Comprehensive information on the risks of the fund can be found in the prospectus or the information for investors pursuant to § 21 AIFMG, section II, “Risk information”.