Capital market commentary from Karin Kunrath, Chief Investment Officer of Raiffeisen KAG
This raises the question of whether the price levels on the (US) stock markets are justified when current negative factors appear to be largely ignored and investors are already focusing on the coming quarters or next year. It is true that companies have repeatedly been able to respond more quickly and effectively to challenging conditions in the past than could have been expected. This seems to justify a healthy degree of optimism and a willingness to overlook immediate dampening effects.
Although there are still a number of uncertainties surrounding the erratic tariff policy, which poses a downside risk to growth and an upside risk to inflation for the US, its impact on the capital market has steadily declined in recent weeks, partly as a result of resilient macroeconomic data. On the other hand, pressure on the Fed to cut interest rates again is mounting. Especially since, on the one hand, there has been no significant rise in inflation to date despite the import tariffs already introduced and, on the other hand, the latest labor market data has fallen short of expectations.
The significantly downwardly revised earnings expectations for the second quarter were clearly exceeded during the reporting season, and the outlook for future earnings growth also appears quite constructive from today's perspective. The ambitious valuation level and the recent technical overbought situation on the stock market indicate that a great deal of optimism has been priced into share prices in a short period of time, making a phase of increased volatility more likely.
However, as long as the regular reality checks in the quarterly reports continue to be so positive, especially for leading US growth companies, and thus show that the effects of tariffs are manageable for the economy, the market should remain well supported. We currently have a neutral position in equities.
Overview of asset classes
French and German government bonds remain attractive
We expect yields on German government bonds with medium maturities (five years) to fall and are correspondingly positive here. Due to the unpredictability of the US administration, we are maintaining a neutral duration position on US government bonds, but expect (as with German government bonds) an even steeper yield curve at the long end. We consider euro government bonds (especially French and German) to be promising
Fewer new issues in the summer months
In the corporate bond market, we remain cautious on US high-yield corporate bonds (despite the recent positive earnings performance). We expect risk premiums to rise in the medium term and are holding back on this bond class compared to US government bonds. As fewer new issues are expected in the summer months, liquidity on the secondary market is also likely to remain rather thin in the short term. We remain neutral on the euro corporate bond market.
Market enthusiasm unconvincing
We remain cautious on emerging market hard currency bonds and do not share the market's optimism regarding emerging market securities. In particular, the tariffs imposed by the US on its emerging market trading partners are likely to have a negative impact in the medium term. We believe that a fair-weather scenario is being discounted here that does not match the real situation (economic dynamics, geopolitical event risks, etc.) and are focusing on other sources of returns.
Developed stock markets are proving very resilient
Global equity markets have recently proven themselves to be very resilient to negative news. Despite the announcement of new tariffs, hopes currently seem to prevail that the damage to companies will be limited. Although sentiment appears somewhat optimistic in the short term (a contrarian indicator), our indicators have improved slightly recently and we have therefore strengthened our equity exposure to a neutral position.
Telecoms and financials have benefited recently
Following the mixed performance of US equities in recent months, a global recovery has set in, particularly in developed markets. Nevertheless, EM equities have been able to maintain the performance advantage they had gained so far this year. The economic impact of the US government's measures remains uncertain. The fundamental valuation for the EM region remains quite favorable. Since the beginning of the year, telecommunications and financial stocks have benefited in particular.
Tariff discussions weigh on industrial metals
The international commodity markets have recently been mixed. Precious metals have recently strengthened somewhat. Structurally, central bank purchases continue to provide sustained support. In industrial metals, tariff discussions surrounding copper weighed on price developments. We believe that precious metals will remain well supported in the coming months.