Capital market commentary from Karin Kunrath, Chief Investment Officer of Raiffeisen KAG
Despite the usual adjustment effects among market participants, there appears to be sufficient confidence that the numerous and sometimes erratic trade policy announcements are part of the US administration's negotiating tactics. Many believe that the economic implications will ultimately dissipate. This confidence explains the continued above-average valuations, even though the current environment and outlook have changed significantly.
The US economy already appears to be in a weakened state due to the higher import tariffs since "Liberation Day" (even if these turn out to be well below the unrealistic initial announcements), the now restricted global trade and the resulting disruption of supply chains, the declining consumer confidence in anticipation of significantly higher prices and fears of a downturn in the labour market, as well as the lack of planning security and increased margin pressure on companies. Accordingly, numerous leading indicators point to a weakening of economic and labour market data in the coming weeks and months.
In addition, the already very high level of US debt will reach a new high following the recently adopted tax reform, further weighing on confidence in the US financial system. Given these conditions, the question arises as to whether the US will experience only a dip in growth, stagflation (i.e. a combination of economic stagnation and higher inflation), or ultimately a "normal" recession, in which the Federal Reserve can take appropriate countermeasures.
Depending on the extent of the downturn in the United States, there could also be a global economic slowdown. Our market indicators continue to confirm a risk-averse positioning, so we remain cautious on equities.
Overview of asset classes
US Treasuries with steeper yield curves at the long end
Due to the unpredictability of the US administration, we are maintaining a duration-neutral position in US government securities for the time being. However, we expect an even steeper yield curve at the long end (10/30-year yield curve), similar to German government bonds. We are positive on euro government bonds, particularly French and German paper.
Risk premiums could rise in the medium term
Despite recent positive earnings performance, we remain cautious on US high-yield corporate bonds. The economic policy favored by US President Trump is likely to further weaken the corporate sector. We expect risk premiums to rise in the medium term and are acting accordingly with caution. We remain neutral on the euro corporate bond market.
Risk premiums have fallen sharply
We remain defensively positioned in emerging market hard currency bonds. The decisive factor for us is the expected higher risk aversion among US dollar bond investors.
Despite the economic policy challenges posed by the US administration, including high tariffs on emerging market countries, risk premiums on emerging market hard currency bonds have fallen sharply and continue to discount a best-case scenario that we do not currently expect.
Erratic measures in the US are causing uncertainty
Global equity markets have recovered surprisingly quickly from the "tariff shock". Hopes for lower tariffs and rapid trade agreements seem to be dominating sentiment at present. However, we still expect the erratic measures taken by the US to cause ongoing uncertainty. Lower economic growth combined with higher inflation rates will also weigh on the corporate sector. We therefore remain cautious.
Fundamental valuation remains favourable
Following the mixed performance of US equities in recent months, a global recovery has set in, particularly in the developed markets. Nevertheless, emerging market equities have been able to maintain their performance advantage over this year. It remains unclear how the US government's measures will affect the economy. The fundamental valuation for the emerging market region remains favourable. Year to date, telecommunications and financial stocks have benefited in particular.
Precious metals well supported
The international commodity markets have been very inconsistent recently. Precious metals gained ground again, benefiting from global uncertainty and sustained support from central bank purchases. While industrial metals also rose slightly, production increases weighed on the energy sector. We believe that precious metals will remain well supported in the coming months.