market view of Raiffeisen Capital Management, Institutional LU, May 2024

marketview

Introduction

The return of volatility

The combination of an overbought, overheated market constellation with three negative factors – firstly, new signs of longer-lasting restrictive US monetary policy, secondly, caution ahead of the reporting season, and thirdly, the geopolitical escalation in the Middle East – brought a sharp surge in volatility at the beginning of the second quarter.

At the macro level, the tenacity of inflation as a result of the robustness of the US economy is causing expectations of fewer and/or later interest rate cuts by the Fed.

At the micro level, the earnings growth trend that is expected on the equity market for 2024 has already been priced in to a high degree, especially for the major tech names, raising the bar even higher for positive surprises in the current reporting season.

On the geopolitical front, the looming risk of war not only popped back up on the radar with the further escalation in the Middle East conflict surrounding Israel, but could also rapidly darken the prospects for the global economy through the vector of a temporary oil shock as a result of extensive fighting in the region.

In the capital market, the diminishing prospects of US interest rate cuts in the near future were reflected in metrics such as US Treasury yields hitting their highs for the year. Profits were taken increasingly on the tech shares that had enjoyed rapid price increases, which caused bitter losses for smaller names in particular. In the context of the geopolitical situation, risk premiums for the crude oil and gold price, for the US dollar, and on the equity market rose in recent weeks after a longer phase of remarkable financial market resilience. A flight into the safe havens of the highest-quality government bonds for fear of a sudden economic downturn, for example as a result of a crisis-driven surge in the oil price, did not come to pass, however.

Our market assessment criteria are still painting a solid overall picture, so we are maintaining our tactical overweighting in equities. The “wall of worry” and thus the risk of elevated market volatility remains, however, especially due to the risk factors from monetary policy and geopolitics.

Your team at marketview

Our market assessment criteria are still painting a solid overall picture.

Market Conditions – Bond Markets

Bond markets under pressure in April

Higher inflation data and stronger economic news from the USA prompted the market to significantly scale back the interest rate cut expectations for the USA once again in April, with the usual results across all asset classes. For the bond market, this meant considerably higher bond yields (by around 0.3 percentage points for ten-year government bonds) and corresponding price declines. The losses were most pronounced for government bonds, whereas corporate bonds benefited from their higher yield cushion and saw much less substantial price declines in April – and high yield bonds were even able to avoid a monthly loss thanks to their much higher spreads.

One striking aspect is the fact that the price declines for euro (government) bonds were similar in scope to those in the USA although the ECB is still on course to start its rate cut cycle in June. However, better economic data in the Eurozone in April likely contributed to the euro market’s failure to escape the negative impact of the US market.

Returns in EUR

Source: Bloomberg Finance L.P., Raiffeisen KAG, 29 Dec 2023–30 Apr 2024; as of 30 Apr 2024

Market Conditions – Equity Markets

Equity market correction in April

The diminished interest rate cut expectations for the USA and even brief – albeit unfounded – fears of a further rate hike in the USA also led to a marked correction on the majority of equity markets in April. This marks the first correction since the start of the rally in early November! However, the price slide already came to a halt towards the end of the month and the markets stabilised again. Support is likely coming from the fact that fewer interest rate cuts are expected in the USA due to the stubborn US inflation as well as the fact that economic data is developing quite well in the major economies. Overall, fewer rate cuts due to a better economic outlook would not be a bad thing for the equity markets. The major outlier in April was – once again – China, which saw an impressive monthly gain, pushing Asia and the Emerging Markets back into positive territory due to the high equity market weighting. The Austrian equity market also bucked the trend – in a positive way this time. And another pleasing development is that most major indices are still showing gains of 5 to 10 per cent since the beginning of the year despite the correction in April.

Returns in EUR, source: Bloomberg Finance L.P., Raiffeisen KAG, 29 Dec 2023–30 Apr 2024; as of 30 Apr 2024

Source: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast, or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including,

or any other damages. (www.msci.com).

Market Conditions – Commodities And Currencies

Higher US interest rates – weaker gold price and stronger US dollar

In short, falling interest rates in the Eurozone paired with still higher US interest rates (for now) have always been a good recipe for a stronger US dollar. Against this backdrop, it is almost surprising how little the US dollar appreciated in April: to just under 1.06 euros per US dollar. By contrast, the low-yielding Japanese yen upheld tradition and was once again weak in April, and the Swiss franc also depreciated.

The prospect of fewer interest rate cuts in the USA (for now) also prompted a correction of the gold price in the second half of April, but it was not even significant enough to offset the increase seen at the beginning of April. Thus, gold is still one of the asset classes with the strongest year-to-date performance – especially in euro terms. Industrial metals (e.g. the copper price) were also strong, in line with an improving economic situation this year, whereas energy prices ended April with hardly any changes.

Source: Bloomberg Finance L.P., Raiffeisen KAG, 29 Dec 2023–30 Apr 2024; as of 30 Apr 2024

Outlook – Global Economic Situation

Source: Bloomberg Finance L.P., as of: 30 April 2024 Global economic situation – GDP 2023–2025

Outlook

Economic recovery for 2024 becoming more concrete

After the most important leading indicators (PMIs) hit a low in the world’s three major economies in the autumn of 2023 and then rebounded significantly in the meantime, the first “hard” economic data that substantiates this economic recovery for 2024 is now starting to appear. The best example: Economic growth in the Eurozone (the weakest of the three major economic areas in 2023) increased by an impressive 0.4 per cent quarter-on-quarter in the first quarter of 2024. This corresponds to 1.6 per cent in annualised terms and is thus above the long-term average for the Eurozone. This is all the more impressive considering the fact that the Eurozone economy had contracted by 0.1 per cent quarter-on-quarter in each of the previous two quarters. In addition, the US economy is still on track for growth –despite a slight decline in the leading indicators recently. The most important fundamental drivers in this context have not changed: firstly, a hefty increase in real incomes in 2024 thanks to high wage growth combined with significantly lower inflation and secondly, the positive effect of the lower interest rates up to that point on the economy in 2025.

Source: Bloomberg Finance L.P., Raiffeisen KAG; as of 30 Apr 2024

Outlook – Inflation And Central Banks

ECB to cut interest rates soon – Fed still waiting

With the most recent (slightly higher) US inflation figure, the Fed felt vindicated in its current wait-and-see stance and is signalling no interest rate cuts in the coming months. The market is now anticipating only one rate cut (by 0.25 percentage points) for this year, followed by further cuts in 2025. The price pressure from the labour market is increasingly falling in the USA as well, so most economists expect inflation to decline further between now and the end of the year.

In contrast to the situation in the Eurozone, however, no further drop in inflation has been seen in the USA recently. Thus, the Fed wants to wait until after the summer in order to get closer to its inflation target of 2 per cent.

In the Eurozone, on the other hand, inflation has already receded to 2.4 per cent p.a., and the ECB is signalling its first rate cut in June. We expect at least a cumulative 75 basis points in rate cuts by the ECB for this year, and further cuts in 2025.

US inflation trend (% p.a.)

Euro area inflation trend (% p.a.)

Austrian inflation trend (% p.a.)

Source: Bloomberg Finance L.P., Raiffeisen KAG; as of 30 Apr 2024

Outlook – Bond Markets

Bond markets: Corporate bonds still preferred

April provided a vivid demonstration of just how quickly the prospect of an economic upswing as we approach 2025 (and the pricing out of interest rate cuts) can put pressure on long-dated bonds in particular, which thoroughly benefited our underweighting of (longterm) government bonds. In light of the now significantly higher yield levels, we are closing our underweighting of long-dated euro government bonds. We are now only underweighted in short-dated euro government bonds as a counter-position to our overweighting of equities.

By contrast, we still significantly prefer corporate bonds. Although the spreads are no longer above-average in this segment, corporate bonds should outperform government bonds in the case of an economic recovery.

At the same time, we are opening a new overweight position in Emerging Market hard-currency bonds, which offer an attractive running yield due to the higher US dollar yield level paired with significant spreads.

Source: Bloomberg Finance L.P., Raiffeisen KAG; as of 30 Apr 2024

Outlook – Global Equity Markets

Equity market: Is the correction over?

As mentioned last month, a brief correction was only a matter of time after several months of a linear stock market rally and partially overheated equity markets – and the timing was nearly impossible to anticipate. The deterioration of the interest rate outlook for the USA provided the impetus for such a trend in April. Now there is no longer a trace of overbought equity markets, which in our opinion provides a solid foundation for a continued positive trend on the stock markets over the medium term. After all, we believe that the improved economic conditions and in turn the less rapid decline in the US inflation rate are the primary factors causing the Fed to hesitate. Historically, however, solid economic development that makes less rapid and less pronounced interest rate cuts necessary has never been a bad environment for the equity market. Especially because better economic output should also lift corporate earnings. And Europe has also been dealt a good hand for 2024 in this context: After all, the economy there is emerging from a recession (that was admittedly only mild) in the second half of 2023 and can look forward to the first year of the economic upswing (generally accompanied by positive stock market performance historically) in 2024. The fact that the ECB also has plenty of room for interest rate cuts (and appears ready to use it) is merely the icing on the cake. Although geopolitical risks will not disappear this year, they are too uncertain to base an investment strategy around. Consequently, we are maintaining our overweighting in the equity markets

Expected earnings growth (for the next 12 months) in %

Source: Bloomberg Finance L.P., Raiffeisen KAG; as of 30 Apr 2024

Outlook – Regional Equity Markets

Selective tactical overweighting and underweighting

Over the short term (tactical), the regional underweighting of Europe and the Emerging Markets was closed for May. Europe is now slightly overweighted, and the Emerging Markets are neutral. In terms of sectors, we have no positions for May. For 2024 as a whole, we still anticipate that the equity market rally will become broader over the medium to longer term. This means that it will not be just a handful of major US tech sector companies that benefit disproportionately, and it will thus be worthwhile to take a broader position in the equities portfolio. Over a one-year perspective, we are thus bullish for equity segments such as Europe, Japan, the health care sector, and the broader technology sector (aside from the major tech groups), as well as companies from the energy transition.

Source: Bloomberg Finance L.P., Raiffeisen KAG; as of 30 Apr 2024

Strategic Asset Allocation

The Strategic Asset Allocation refers to the assessment of the various asset classes over a long-term horizon.

A model-induced increase in euro equities was undertaken in Q1 2024. At the beginning of March, we took profits on euro equities and Japanese shares while adding Chinese shares as new investments in the portfolio. We have positions in European equities, EM equities, and Japanese equities. US equities remain unattractive, with an eye to the valuations.

We made significant purchases of government bonds in recent quarters (last move in April), starting with non-euro bonds and then also European govern ment bonds. In the middle of December, we slightly reduced our positioning in the interest rate segment due to the yield declines. We bought into US interest rate risk again in the middle of April after the latest yield increases.

After substantial spread narrowing over the last months, we reduced corporate bonds (IG and HY), Italian government bonds, and hard-currency EM bonds at the beginning of March. We took profits on EM currencies in several steps in 2023.

*all statements refer to the SAA of the funds Raiffeisen 337 – Strategic Allocation Master and Raiffeisen-GlobalAllocation-StrategiesPlus.

Source: Raiffeisen KAG, as of May 6th 2024; this forecast/estimate is no reliable inference to the future performance.

In September 2023, we used the strong performance of energy commodities to reduce investment. Along with positions in inflation-linked bonds, we also have positions in the commodities sectors (via derivatives on materials indices), precious metals, industrial metals, and energy commodities.

Tactical Asset Allocation May

The Tactical Asset Allocation steers market-oriented mixed funds such as the Raiffeisen strategy funds over the short to medium term. The positioning of the fund management can differ from that of other capital market analysts (e.g. Raiffeisen RESEARCH GmbH).

■ Economy: Slight deterioration of US leading economic indicators, improvement for rest of world; decline in (US) inflation stalled, Fed signalling persistently high interest rates for now; however, first ECB key rate cut likely in (early) summer

■ Corporate sector: US corporate earnings above expectations thus far in Q1/24, Europe also surprising on upside; earnings revisions currently edging upward in all regions; expected earnings momentum over course of year remains positive

■ Sentiment: Overheated/overbought market constellation dispelled by correction, currently no extremes; market breadth (names, sectors, regions) remained intact during consolidation

■ Technical analysis: Global equities (EUR) are overbought; but in a stable uptrend; market breadth has widened considerably (names, sectors, regions); relative-strength trends still moving towards cyclical sectors

■ Special topics: Monetary policy; geopolitics; bumper election year in 2024

■ Positioning: Equities overweighted by two steps (out of 4) (unchanged); global equities now only overweighted versus short-dated euro government bonds

This forecast/assessment is not a reliable indication of future performance.

Indicators – Overview Of Market Development

Source: Bloomberg Finance L.P., 30 April 2024, YTD = change compared to previous year-end; past performance is not a reliable indicator for future development. Source: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement. merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, fast

or any other damages. (www.msci.com).

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 and 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, accuracy, or completeness of the information presented and the sources of information, or in respect of the accuracy of the forecasts presented herein. Similarly, any forecasts or simulations of earlier fund performance presented in this document do not provide a reliable indication of future performance. Furthermore, investors with a home currency different than the currency of the fund or portfolio should note that returns can also rise or fall due to currency fluctuations.

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 individual investment advice or other consultation. If you are interested in a specific product, along with your bank advisor, we will be happy to provide you with the prospectus and the information for investors pursuant to § 21 AIFMG, prior to purchase. All specific investments should be made following a consultation and discussion, and after having reviewed the prospectus and the information for investors pursuant to § 21 AIFMG. It is expressly noted that securities transactions can involve significant risks and that taxation of such depends on personal circumstances and is subject to change in the future.The performance of investment funds is calculated by Raiffeisen KAG and that of real estate investment funds by Raiffeisen Immobilien Kapitalanlage GmbH pursuant to the OeKB method, based on the data from the depository bank (in the event that payment of the redemption price is suspended, available indicative values are used). Individual costs, in particular the issue premium, any applicable return fee, and taxes, are not taken into account in calculating performance. Depending on the specific amount, these costs reduce the actual performance accordingly. The maximum amount of the

Reproduction of the information or data, in particular the use of texts, text sections, or graphic material from this document, requires the prior written consent of Raiffeisen KAG.

issue premium and any applicable return fee can be found in the key investor document (key information document) or the simplified prospectus (real estate investment funds). The performance of investment funds is calculated by Raiffeisen KAG and that of real estate investment funds by Raiffeisen Immobilien Kapitalanlage GmbH pursuant to the OeKB method, based on the data from the depository bank (in the event that payment of the redemption price is suspended, available indicative values are used).

Individual costs, in particular the issue premium, any applicable return fee, and taxes, are not taken into account in calculating performance. Depending on the specific amount, these costs reduce the actual performance accordingly. The maximum amount of the issue premium and any applicable return fee can be found in the key investor document (key investor information) or the simplified prospectus (real estate investment funds). The performance of portfolios is calculated by Raiffeisen KAG in time-weighted terms (timeweighted return, TWR) or in money-weighted terms (money-weighted return, MWR) [refer to the presentation section for details] based on the last known market price or foreign exchange rate or information available via securities information systems. Past performance is not a reliable indicator of the future performance of an investment fund or portfolio. Performance is expressed in per cent (without fees) assuming the reinvestment of all dividends. The German-language versions of the published prospectuses and the information for investors pursuant to § 21 of the Austrian Alternative Investment Fund Managers Act (Alternative Investmentfonds Manager-Gesetz, AIFMG) as well as the key information documents for the funds of Raiffeisen Kapitalanlage-Gesellschaft m.b.H. may be downloaded from the “Kurse und Dokumente” section of the website www.rcm.at (for some funds, the key information documents may also be available in English). Alternatively, where units are sold outside of Austria, these documents may also be downloaded from the “Kurse und Dokumente” section of the website www.rcm-international. com in English (or possibly German) or else the language of your country. A summary of investors’ rights in German and English is available via the following link: https://www.rcm.at/corporategovernance. Please note that Raiffeisen Kapitalanlage-Gesellschaft m.b.H. has the right to terminate the arrangements made for the distribution of fund unit certificates outside of the fund’s country of domicile, Austria.

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