30th March 2020 | current information | institutional investors
Update on corona virus pandemic Relief rally on the financial markets - is the worst over?
The following assessments focus on the current market situation and can change at any time without prior notice. They do not constitute a forecast for the future development of the financial markets or the funds of Raiffeisen KAG.
Last week saw some strong advances and counter-movements in the financial markets. Even very poor economic data (US unemployment claims, PMIs in Europe) and the rapidly growing number of infections worldwide (especially in the US) were shrugged off by stock markets. Another positive sign: Despite the tense situation, a couple of new corporate bond issues were successfully placed by very creditworthy names for the first time in several weeks. Have we thus already hit rock-bottom prices on the stock markets? Are we changing our defensive stance in mixed funds and mixed portfolios?
Equity weightings still significantly reduced From today's perspective, there is a lot to suggest that we have at least put most of the stock price declines behind us. However, it is by no means certain that we have already seen the absolute lows on the stock markets and based on all historical experience, this seems rather unlikely. It is still too early to sound the all-clear on the stock markets, even though we may witness some more stock market advances in the coming days and weeks. The imponderables and risks for economies, companies and financial markets will remain extremely elevated for the time being and, so will price fluctuations, in all likelihood. There is no visibility yet with respect to the evolution of the pandemic or the extent and duration of containment measures. Hence, growth and earnings prospects for companies are highly unpredictable. The only thing that seems certain at the moment is that the slump in growth worldwide will probably be much greater than in the global financial crisis of 2008/2009. While the global economy is still digesting a supply and demand
shock emenating from China, it is now China, too, that is facing new shocks from Europe and the USA as well as from major emerging markets on both the supply and the demand side. Focus on risk management to remain for now In recent weeks, our Tactical Asset Allocation (TAA) decisions have been dominated by risk management considerations, and for the time being it will remain this way. Extreme volatilities everywhere, even in otherwise low volatility asset classes such as US Treasuries, are not a suitable environment for aggressive new risk taking and instead argue for reducing and managing risks. After considering all relevant factors and recent developments, the TAA will therefore stay put for the time being, maintaining significantly reduced equity weightings or significant hedges of equity exposure, respectively. In contrast, the duration short in the bond space will be reversed (see below).
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On the equities side, it should also be noted that individual regions, sectors and companies are affected in very different ways by current developments. The picture there is of course constantly evolving, especially as a result of measures taken by governments and central banks. Beyond absolute equity exposure, different weightings of sectors and regions and non-directional strategies can be used both to react flexibly to such developments and to generate additional returns. We continue to see the progression of the pandemic and the countermeasures taken by central banks and authorities as the key to an eventual bottoming out and a sustained recovery on the stock markets. As is well known, our risk management arsenal also includes asymmetric hedging strategies, which are implemented in various institutional funds and mandates as well as in Raiffeisen Global Allocation StrategiesPlus, among others. These safeguards have worked very well. Duration hedges lifted Regarding interest rate exposure, we have neutralized the duration short that we had put on earlier this month. Governments and central banks are injecting a ton of money and have launched huge aid packages. As a result, the environment and expectations on the bond markets have changed dramatically within the last few days. The measures taken to reduce duration risk worked very well but are no longer appropriate in the new market setup.
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and than ETFs which have become so fashionable in recent years. Secondly, they seem to have weathered the crisis so far with above-average performance. This is also reflected in the sustainability funds of Raiffeisen KAG. For one, this is due to the fact that a number of industries have been especially hard hit by the crisis (e.g. oil production, airlines, tour operators, automobile companies) that are barely or not at all represented in our sustainability funds. The products and services of some of the companies in our funds are even in particularly high demand in the fight against the coronavirus, although we had already invested in them for a long time and therefore regardless of these additional boosts. Furthermore, within our sustainability investments (but not only there) the financial health of companies is a key criterion in our stock selection process. In crisis situations such as now, the wheat obviously separates particularly quickly from the chaff. Finally, we note that the social component within the ESG criteria is currently also very much in focus. Companies that take their social responsibility seriously right now could derive some long-term benefits from this approach.
Strategic Asset Allocation (SAA): First purchases of equities and spread products In contrast to the TAA, our SAA, as is well known, focuses on very long-term time horizons, with a strong emphasis on fundamental valuations. Equities and spread products (emerging market bonds, corporate bonds) have fallen from expensive or very expensive levels to partially attractive valuations within a few short weeks. The SAA has seized this opportunity to buy equities and selected spread products as a first step. Further purchases could follow, especially if there are further price declines in these asset classes.
Sustainable investing works in the long term! Of course, companies that operate sustainably are not immune to economic crises and ESG investments1 are not exempt from drawdowns and losses in value. Our sustainability funds have also suffered some painful price setbacks. Long-term investors who have invested in these funds for five or more years, however, are still sitting on good gains. Our major ESG mutual funds continue to outperform the broad market indices and their benchmarks, sometimes by a significant margin. We remain convinced that the future belongs to sustainable investments and that they offer good long-term return prospects despite all the associated risks. It should not be underestimated that sustainable management and the change towards greater sustainability will take place first and foremost over the long term. Sustainable companies therefore also need long-term capital providers and shareholders. While this is the case with our funds and our investment strategies, we are in turn inherently dependent on correspondingly long-term (fund) investors.
Sustainable investments have held up better than average so far There are two very interesting observations to be made regarding sustainable investments. Firstly, at least until now they seem to be experiencing significantly fewer capital outflows than many non-sustainable investments
Smooth transition of business operations For two weeks now, large parts of our daily business processes have been handled by the vast majority of our employees via home office and by means of modern telecommunications. We can state with great satisfaction that in essence everything is running smoothly and that the
ESG stands for environment (E), social (S) and corporate governance (G).
Raiffeisen Capital Management stands for Raiffeisen Kapitalanlage GmbH or short Raiffeisen KAG | www.rcm-international.com
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workflows, virtual meetings as well as decision-making and communication processes have become well established very quickly. We have done everything possible to minimize any risk of infection within the company and have so far been spared corona virus cases. At the same time, we have very robust crisis mechanisms in place to ensure that we remain fully capable of acting at all times even if colleagues become unavailable. At present, we are undoubtedly benefiting from the fact that we have always very rigorously implemented all the requirements of the regulatory authorities for preparing for possible emergencies. It goes without saying that the entire current situation is not easy for anybody and that it is associated with increased tension for everyone - for our fund investors and investors,
our business partners and our employees. The experiences of the past days and weeks and the positive feedback we have received during this time reinforce our conviction that we will master these challenges together and successfully.
Investments in funds are subject to the risk of price fluctuations and capital losses. The published prospectus as well as the key investor information for the funds of Raiffeisen KAG available at www.rcm-international.com in English language or your national language.
The investment strategy permits the Raiffeisen GlobalAllcoation StrategiesPlus to predominantly (relative to the associated risk) invest in derivatives. The Fund Regulations of Raiffeisen GlobalAllcoation StrategiesPlus have been approved by the FMA. The Raiffeisen-GlobalAllocation-StrategiesPlus may invest more than 35 % of the fund's volume in securities/money market instruments of the following issuers: France, Netherlands, Austria, Belgium, Finland, Germany. Low or even negative yields on money market instruments and bonds induced by the market can have a negative effect on the net asset value of Raiffeisen GreenBonds or be insufficient to cover the recurrent costs. The Raiffeisen GlobalAllocation StrategiesPlus exhibits elevated volatility, meaning that unit prices can move significantly higher or lower in short periods of time, and it is not possible to rule out loss of capital.
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Disclaimer This document was prepared and edited by Raiffeisen Kapitalanlage-Gesellschaft m.b.H., Vienna, Austria (“Raiffeisen Capital Management” or “Raiffeisen KAG”). Despite careful research, the statements contained herein are intended as non-binding information for our customers and are based on the knowledge of the staff responsible for preparing these materials as of the time of preparation. They are subject to change by Raiffeisen KAG at any time without further notice. Raiffeisen KAG assumes no liability whatsoever in relation to this document or verbal presentations based on such, in particular with regard to the timeliness or completeness of the information presented and the sources of information, or in respect of the accuracy of the forecasts presented herein. This document is neither an offer, nor a recommendation to buy or sell, nor an investment analysis. It is not intended for use in lieu of investment advice or other consultation. If you are interested in a specific product, we or your bank advisor will be happy to provide you with the prospectus for your information prior to purchase. Specific investments should only be made following professional consultation, and after discussing and reading through the prospectus. It is expressly noted that securities transactions can involve significant risks. Editorial deadline: 30.03.2020, Raiffeisen Kapitalanlage-Gesellschaft m.b.H., Mooslackengasse 12, A-1190 Vienna Imprint: Media owner: Zentrale Raiffeisenwerbung Publisher, produced by: Raiffeisen Kapitalanlage-Gesellschaft m.b.H., Mooslackengasse 12, 1190 Vienna
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