market view of Raiffeisen Capital Management, April 2024, Institutional

Introduction

A comparison that does not hold up

The markets have been dominated by two major topics for some time now. One is the prospect of interest rate cuts, and the other is the megatrend of artificial intelligence (AI). There is still a definite degree of uncertainty surrounding interest rate cuts because of the stubborn inflation dynamics, which are especially having an impact on the bond market. The topic of AI took firm hold as a driver of the equity market in the spring of 2023 and has yet to lose steam. The string of reports from AI-heavy companies about enormous demand and the associated growth potential for technology for the implementation of AI applications and for boosting productivity in many areas have increasingly cemented the trend.

In light of the latest price rally, more and more comparisons are being drawn with the boom surrounding Internet shares at the end of the 1990s, because trends are of course sometimes overblown for a time on the equity market, valuations inflated, and future potential priced in. But the comparison with the late 1990s is poor in so far as the Internet shares that were hyped at the time were

often new on the market after euphoric IPOs, and many of these companies had yet to generate revenue worth talking about, let alone profits.

The major tech names that are now also dominating the AI space have been on the market for years or decades, have robust business models and market positions, and a long track record of revenue and profit generation. And unlike back then, the breadth of the market has widened considerably, causing the uptrend to be carried by many more segments and individual names. And in 1999/2000, the central banks markedly increased their key rates while rate cuts are currently expected for 2024 and the years to follow. This means that the current overall conditions are not really comparable with those around the turn of the millennium. Even if there is especially no lack of geopolitical tensions at present and there are without a doubt certain risk factors that may bring temporary market corrections, we still see positive market conditions overall for risky assets. Thus, our positioning remains offensive with an overweighting of equities and an underweighting of bonds.

Your team at marketview

The topic of AI took firm hold as a driver of the equity market in the spring of 2023.

Market Conditions – Bond Markets

Bond markets: A pause for yield increases

After the significant yield rise in January and February, this trend stalled in March and the yield level for the most important government bond markets stabilised over the past month. It thus seems that the bond market has digested the somewhat stronger economic data in the USA and Eurozone since the beginning of the year for the time being. The expectations for interest rate cuts that were still (too) high at the start of the year have since declined in the market and have been pushed back in terms of timing – and now seem to be much more realistic in our view. The performance for the year to date reflects this trend, with German government bonds posting slightly negative performance since the start of the year due to the yield uptrend. However, most spreads narrowed at the same time. The reasons for this were an improved economic outlook and growing risk appetite, as clearly shown by the equity market rally. This brought positive performance for “more risky” bond classes such as corporate bonds and Italian government bonds. In addition, the stronger US dollar since the start of the year allowed USD bonds to generate additional positive performance. USD high yield issues are thus at the head of the pack, where both effects (stronger US dollar and declining yield premiums) are combined.

Returns in EUR

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

Market Conditions – Equity Markets

Equities rally still going strong in March

The steep equity market rally that has been charging ahead since November continued in March and brought numerous stock indices to new all-time highs. This resulted in impressive month-on-month performance of around 3 per cent on most exchanges. This already puts the performance for the year to date in the low double digits on some exchanges!

Even the ATX finally gained momentum again in March and was the strongest equity market on our list in monthly comparison. The biggest outliers were China (as we already saw in 2023) and Latin America (new this year).

The main drivers of this impressive rally, especially in the industrialised countries, have not changed.

First is better economic data, especially leading indicators, which suggests that the US economy will pull off a soft landing, and that the European economy will stabilise and subsequently rebound. Second is prospects that the central banks will cut interest rates even if there is no recession, as the inflation rate keeps falling and should approach the inflation target in the foreseeable future.

Earnings in EUR, Source: Bloomberg Finance L.P., Raiffeisen KAG, 29 Dec 2023 – 29 March 2024; as of: 29 March 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, without limitation, fast profits) or any other damages. (www.msci.com).

Market Conditions – Commodities And Currencies

Weak franc and strong gold in March

Not a whole lot happened with the most important currency pairing of EUR and USD in March. At just under 1.08, it closed the month practically at the same level as at the start of the month and in the middle of its fluctuation range for the past 12 months. But the US dollar has been one of the strongest currencies since the start of the year while the low-interest currencies Swiss franc and Japanese yen are at the tail of the pack this year, and depreciated further in March. Not even the first interest rate hike in Japan since 2007 – though it was just to zero –was enough to change this. The interest rate differential to the euro and especially the US dollar is apparently (still) too great.

In the commodities space, especially the gold price stood out in March. It finally broke out of its long sideways trend in March and posted a hefty rise from around USD 2050 at the end of February to roughly USD 2250 at the end of March – close to 10 per cent in one month!

Since beginning of year

Over previous month

metals

Returns in EUR

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

Outlook – Global Economic Situation

Source: Bloomberg Finance L.P., as of: 29 March 2024

Outlook – Global Economy

Economic recovery still on track for 2024

A look back at the previously ailing economy (Austria in a recession in 2023 and the Eurozone with practically zero growth) shows clearly how much the economic outlook has brightened over the past months. After the most important leading indicators (PMIs) hit a low in the world’s three major economies in the autumn of 2023, they have all rebounded significantly since then – especially in the Eurozone as the weakest region most recently.

In the USA, this makes a soft landing (no recession despite significant key rate hikes in 2023) the most likely economic scenario for 2024 by far. And the Eurozone should return to moderate economic growth in the next quarters – with “normal” GDP expansion in 2024. The most important fundamental drivers are declining interest rates and a hefty increase in real incomes thanks to high wage growth combined with significantly lower inflation.

Source: Bloomberg Finance L.P., Raiffeisen KAG, as of: 29 March 2024

Outlook – Inflation And Central Banks

Countdown to key rate cuts – especially in Europe

Even if individual monthly inflation components were a bit higher at times in the USA, the overall inflation downtrend has not been interrupted. This is especially true of the Eurozone, where inflation has already retreated to 2.4 per cent p.a. – down from around 7 per cent just a year ago. And the core inflation rate (inflation without energy prices) recently fell further to 2.9 per cent p.a. The lagging effect of the previously weak economy and lower energy prices on the (core) inflation rate should bring inflation down further as the year progresses.

This means that the European Central Bank’s (ECB) inflation target of 2.0 per cent may be reached considerably earlier than projected by the ECB (in 2025). This gives the ECB plenty of room for interest rate cuts. We still expect the start of a cumulative 100 basis points in interest rate cuts for this year in June, and further cuts in 2025. In the USA, by contrast, doubts have grown that the US Fed will start making cuts in June due to the recent stronger economic and labour market data. There, as well, the significantly lower inflation leaves enough room for the 125 to 150 basis points in key rate cuts that are priced in by the end of 2025 – even if the cycle starts somewhat later.

Source: Bloomberg Finance L.P., Raiffeisen KAG, as of: 29 March 2024

Outlook – Bond Markets

Bond markets: interest rate cuts now priced in?

As described above, we believe that the key rate cuts that are currently priced in by the market are realistic for the most part. This means that they should be more or less fully priced in in the bond markets in the USA and the Eurozone. Unlike at the start of the year, where the expectations for interest rate cuts were too aggressive and the long-term bond yields were thus too low.

But we still do not see any prospects for significant price increases for government bonds at this level. The coming interest rate cuts are already sufficiently priced in considering the massively inverted yield curve (long-term yields well below the current short-term yields). And an economic upswing as we approach 2025 could especially increase the pressure on long-dated bond prices.

We still prefer corporate bonds despite the decreased yield premiums, as they will likely profit from an economic uptrend. Thus, we are underweighted in German government bonds and overweighted in corporate bonds (IG, euro). We remain generally underweighted in bonds versus the equity markets because we expect to see better (relative) performance from the latter.

Source: Bloomberg Finance L.P., Raiffeisen KAG, as of: 29 March 2024

Outlook – Global Equity Markets

Equity market: still overweighted

The equity market rally that started in November 2023 was without a doubt impressive, and temporary price declines will be very hard to avoid after many months of a nearly linear uptrend in the equity markets. Some indicators are also already showing somewhat overheated market sentiment. But even these sentiment indicators have upside potential, and they would have cooled off again quickly after a few more sedate weeks on the equity market.

Aside from such short-term considerations, we still have a very positive equity market outlook for 2024. Fading inflationary pressure and the related string of interest rate cuts in conjunction with a soft landing for the US economy (and a significant recovery for the European economy during the year) will provide an excellent environment for further price increases in 2024.

Corporate earnings (and before that earnings expectations) should also rise further under such conditions. At the same time, the valuations for most equity markets are not (yet) expensive, aside from the major US tech names. In this environment, there is significant potential that equities will enjoy an excellent year, and it would be a shame to miss this just to avoid a temporary correction on the market. Consequently, we are maintaining our overweighting in the equity markets.

Source: Bloomberg Finance L.P., Raiffeisen KAG, as of: 29 March 2024

Outlook – Regional Equity Markets

Selective tactical overweighting and underweighting

Over the short term (tactical), we remain significantly overweighted in the US equity market versus the rest of the world in April as well. In regional terms, the underweighting in Europe and also the Emerging Markets was even increased somewhat. In terms of sectors, we are optimistic about energy and not about Eurozone banks, which rose very significantly as of late. There is generally an overweighting of more expensive markets. All in all, we are betting on the underperformance of value shares, rising markets (less market risk), and the outperformance of developed markets versus Emerging Markets over the short term.

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 (also) 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.

Change in earnings expectations for 2024 (DJ EuroStoxx)

in the last 3 months in the last month

Source: Bloomberg Finance L.P., Raiffeisen KAG, as of: 29 March 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 October), starting with non-euro bonds and then also European government bonds.

Following the substantial yield declines that started in October 2023, we then slightly reduced our positioning in the interest rate segment in mid-December.

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. Equities

In September 2023, we used the strong performance of energy commodities to reduce investment.

Along with positions in inflationlinked bonds, we also have positions in the commodities sectors (via derivatives on materials indices), precious metals, industrial metals, and energy commodities.

*all statements refer to the SAA of the funds Raiffeisen-Global-Strategic-Opportunities and Raiffeisen-GlobalAllocation-StrategiesPlus.

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

Tactical Asset Allocation April

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: Growth dynamics generally positive (USA) or improved (Europe); focus on labour market, consumer sentiment, and inflation; (US) inflation decline slowed, later and lower interest rate cuts

■ Corporate sector: Earnings revisions positive for USA and Europe after earnings season; trend for earnings expectations: up in the USA, sideways in Europe; optimistic outlook for corporate earnings in 2024 and the following years

■ Sentiment: Contrarian indicators increasingly showing overheated market sentiment; positions in riskier assets still have upside potential; volatility still at historic low

■ 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

±0 vs. previous month Maximum

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

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

■ Positioning: Unchanged: Equities overweighted by two steps (out of four); global equities versus long-dated euro government bonds; global equities versus short-dated euro government bonds

Indicators – Overview Of Market Development

Source: Bloomberg Finance L.P., 29 March 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 profits) or any other damages. (www.msci.com).

Raiffeisen Capital Management

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

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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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