market view of Raiffeisen Capital Management, September 2022, Institutional

Page 1

marketview

09/22


Introduction Outlook for equities remains subdued A turnaround in monetary policy is not anticipated in the near future, and this realisation put an end to the summer rebound on the equity markets. However, it really should not come as a major surprise to anyone. First, inflation rates remain near peak levels. Second, Fed officials have regularly stepped in to correct excessively optimistic market expectations. Third, the labour markets – which are an important indicator of economic conditions – still look robust. And finally, the equity markets are holding up relatively well, despite all of the difficulties. Thus, from the perspective of the monetary authorities, there is no reason to deviate from the path of monetary policy tightening. Moreover, another factor for the ECB is the sharp depreciation of the euro, which is generating additional inflationary pressure. As a result, the possibility of interest rate hikes of three quarters of a percentage point is even being considered in Europe, which would have been unthinkable just a few short months ago.

Hence, the markets have to get used to the idea that – in contrast to recent years – the central banks are not going to come rushing in to help when the going gets rough. In this cycle, it is going to take longer before there is a change of direction in monetary policy. At the same time, a number of leading economic indicators are dropping precipitously. In conjunction with the high energy costs, there are prospects for a sharp downturn in global economic activity, which will lead to a recession in some areas. Bearing this in mind, it is only a matter of time before corporate earnings start to decline. Looking to the immediate future, the factors affecting the equity markets thus clearly indicate that a defensive orientation is appropriate. Consequently, the underweight positions in the mixed funds are maintained at the previous levels. Furthermore, the weighting of euro bonds is reduced. Short-dated USD bonds und commodities are being purchased.

Along with the high energy costs, a sharp downturn in the global economy is on the horizon.

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Content Market conditions

Outlook

Asset Allocation

Indicators

4

7

13

15

5

8

14

6

9

Bond markets

Equity markets

commodities and currencies

Global economic situation

Global economy

Strategic Asset Allocation

Overview of market development

Tactical Asset Allocation

Inflation and central banks

10

Bond markets

11-12 Global equity

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Bond market conditions Bond market: Summer rebound in prices already over USA sovereigns

2.1%

-1.2

Year to date Month on month

0.6%

USA high yield -0.8

-2.5%

-1.0

EM local currency

-3.2% -11.5%

Germany sovereigns Euro high yield -1.2

-12.2%

Euro corporates

-4.2

-13.5%

Italy sovereigns

-4.0

-14.4%

-0.6

-20.0%

-1.2

-15%

EM corporates EM hard currency UK sovereigns

-10.7 -20%

1.3

-4.8

-12.0%

-21.5%

USA corporates

Volatility for bonds also remained higher than average recently: In August, the bond markets were able to recoup most of the sharp decline in yields that was registered in July (and late June). In the USA, yields on ten-year government bonds are now back to around 3.2%, which roughly corresponds to the high from the last rate hike cycle in 2018. In the euro area, the yield on ten-year German government bonds rose to around 1.5% again. The renewed strong increase in yields was mainly driven by the central banks. In the USA and Europe in particular, the central banks made it clear that they expect higher interest rates to be necessary for a longer period of time than most investors are anticipating. As a result, almost all bond segments recorded ne­gative monthly performance in August. This was especially pronounced for government and corporate bonds in the euro area and the United Kingdom.

-10%

-5%

0%

5%

Returns in EUR Source: Bloomberg Finance L.P., Raiffeisen KAG, 31 Dec 2021 – 31 Aug 2022; as of: 31 Aug 2022

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Equity market conditions Equity market: Was the summer upturn just a bear market rally? Latin America

20.4%

4.2

-0.5% Dow Jones Industrials -2.1

EM Global

-6.7% -7.0%

1.8

-2.8

Asia

-7.2%

-1.5

1.6

-4.9 -5.1

-19.2%

-4.8

-22.1%

-4.3 -20%

Nikkei China

-9.0%

-16.3%

Year to date Month on month

1.8

-7.5%

-11.8%

MSCI World

-10%

MSCI Europe Euro STOXX 50 DAX ATX 0%

10%

In August, the strong rebound on the equity market from the previous month also reversed direction again, as the summer rally turned into a rout starting from midmonth. Some of the particularly weak indices, such as the German DAX, even tested their lows for the year. Similar to the bond markets, the more aggressive interest rate outlook of the major central banks was also a key factor for equities, echoing the situation from the first half of the year when mounting worries about interest rates caused both equities and bonds to fall at the same time. In Europe, other negative factors included the skyrocketing gas and electricity prices, and a corresponding weakening of leading economic indicators. By contrast, China, Asia, and the Emerging Markets (EM) (including Latin America) generally held up well again and bucked the trend. This highlights the value of regional diversification, in the course of which one should not forget the Emerging Markets.

20%

Returns in EUR Source: Bloomberg Finance L.P., Raiffeisen KAG, 31 Dec 2021 – 31 Aug 2022; as of: 31 Aug 2022

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Market conditions for commodities and currencies EUR/USD: Euro goes sub-parity

RUB BRL

21.6%

1.5

USD

13.1%

1.7

CHF

5.6%

-1.0

-0.8

GBP

-3.0

-6.3%

Year to date Month on month

4.1%

CNY

-2.7%

39.5%

3.9

JPY

-2.5

-10%

0%

Energy

10%

20%

30%

40%

101.7%

2.4

Industrial metals 0.4% -1.3

Precious metals 0.0% -3.6

0%

20%

40%

60%

80%

100%

Returns in EUR Source: Bloomberg Finance L.P., Raiffeisen KAG, 31 Dec 2021 – 31 Aug 2022; as of: 31 Aug 2022

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The appreciation of the US dollar that has been ongoing for more than a year now continued in August, causing the euro to fall (just barely) below parity for the first time since autumn 2002. Even though the US dollar is thus very expensive, this development is understandable, as the energy crisis is mainly a European problem that does not directly impact the USA. In line with this, the market believes that the US Federal Reserve will move to a significantly higher level of interest rates compared to the ECB. Both the British pound and the Japanese yen were even weaker than the euro, as the development of interest rates for those currencies is expected to lag even further behind the USA. The Russian rouble, which is still not freely convertible, also remained hypothetically strong in August. Commodities: The steep rise in interest rate expectations also depressed the gold price in August, while industrial metals remained unchanged on the whole. The increase in the energy price index was minimal: This index is dominated by the oil price, which barely changed in August, while the skyrocketing gas and electricity prices in Europe hardly play a role in this global index.

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Outlook – Global economic situation Global economic situation – GDP 2021–2023 4.2% Russland 5.2%

5.7%

2.8%

0.8%

2021 2022 2023

1.7% 1.1% 2021 2022 2023

4.7%

Eurozone

3.5%

5.2%

USA

2021 2022 2023

1.8%

0.8%

2021 2022 2023

2021 2022 2023

Afrika

Brasilien

2.9% 2.7%

2021 2022 2023

China

8.7%

Indien 5.8%

-3.0% -7.3%

8.1%

4.0% 3.1% 3.4%

2021

2022 2023

2021

Japan

1.7% 1.5% 1.6% 2021 2022 2023

7.2% 6.4%

2022 2023

Welt

Source: Bloomberg Finance L.P., as of: 31 Aug 2022

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Outlook – Global economy Recession in the euro area: How long and how bad? 70

60

53.6 49.5

50

40

30

45.0

Economy – leading indicators (PMI Composite), comparison

7/2020 USA PMI

9/2022 EUR PMI

Source: Bloomberg Finance L.P., Raiffeisen KAG

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China PMI

A recession in the euro area during the winter half-year is looking increasingly likely, due to the ongoing declines in leading economic indicators and the de-facto suspension of gas deliveries by Russia. The IMF estimates, however, that this downturn may be considerably milder than the slump in production registered during the coronavirus recession in 2020. There are also good chances that it will be followed by a strong economic recovery during the course of 2023. This is because gas supply will likely improve significantly starting from the spring (lower seasonal demand and a sharp increase in the supply of liquefied natural gas), and the development of real income is also expected to look better again (higher wages coupled with lower inflation compared to 2022). By contrast, in the USA we still see the strange situation that even though GDP already contracted in the last two quarters, economic conditions on the whole appear to be significantly better than inthe euro area. While leading indicators (PMIs) are also trending lower in the USA, the odds that the US economy will achieve a “soft landing” at the end of the current slowdown are much higher. In China, the weakness caused by the real estate market is currently being obscured by the choppy performance related to the coronavirus: following the latest lockdown, the economy is now in recovery mode, but there is a constant risk of more lockdowns.

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Outlook – Inflation and central banks Key rate expectations jump higher again 10.0

9.1% 9.1% 8.5%

8.0

New inflation peaks in Europe thanks to gas prices

6.0

4.0

2.0

0.0

-2.0

-4.0

1/2008 Inflation, USA (%, yoy) Inflation, euro area (%, yoy) Inflation, Austria (%, yoy)

9/2022

Even recently, the market was still expecting that the latest round of rate hikes would be replaced with rate cuts in 2023 already. In light of the hawkish comments by leading Fed and ECB central bankers in August, investors have now mostly given up these hopes: Caught between the weaker economic performance and stubbornly high inflation, the central banks intend to focus mainly on the latter. Even in the face of weakening economic activity, the central banks are willing to continue raising interest rates and to leave them at high levels in 2023. In reflection of this, relatively large interest rate hikes are expected at the upcoming rate-setting meetings of the ECB and the Fed, which may result in preliminary highs of around 4% in the USA and just over 2% in the euro area. While the US rate of inflation has probably already passed its peak thanks to the lower oil prices, the Fed still feels that wage and inflationary pressure are too high. By contrast, euro area inflation will likely exceed 10% this year still, due to surging gas and electricity prices, and then only fall sharply lower in 2023.

Source: Bloomberg Finance L.P., Raiffeisen KAG

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Outlook – Bond markets Bond market: intense volatility in prices 12

6

10

5

8

4

6

3

4

2

2

1

0

0

1/2011

9/2022

6.5 2.9

Bonds continue to be buffeted by weakening economic activity (as a positive factor) on the one hand and high rates of inflation along with aggressive rate hikes (as a negative factor) on the other. The result of this is high vola­tility in bond prices. Following the latest decline in the oil price, we see an interesting opportunity after a temporary pause to once again underweight bonds versus commodities (dominated by oil in our benchmark). Within the bond market, we continue to have the strongest preference for corporate bonds and remain heavily overweighted in this segment. Our focus here is still on higher quality issuers (IG), including financials, at the expense of high yield (i.e. weaker) issuers. In particular, the latter would be much more strongly impacted in the event of a recession. In terms of countries, we maintain the overweighting in US government bonds versus Germany and the tactical overweighting in Italy versus Germany.

HY yield, left-hand scale IG yield, right-hand scale Source: Bloomberg Finance L.P., Raiffeisen KAG

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Outlook – Global equity markets Underweighting from early August remains in place 105

Equity market performance in local currency 100

82.9 95

90

86.3 85

82.9

80

75

1/2022 European equities (Stoxx 600, net total return) US equities (S&P 500, net total return) Japanese equities (Topix, net total return)

Source: Bloomberg Finance L.P., Raiffeisen KAG

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9/2022

We used the quick recovery on the equity market to expand our short-term (tactical) underweighting of equities to three steps. In the meantime, the stock exchanges have now headed lower again. We stick with our tactical underweighting, as we still expect a further decline in the key leading economic indicators and in the optimistic earnings expectations on the equity market. Moreover, an end to the policy of aggressive interest rate hikes is not yet in sight. On the contrary, both the Fed and the ECB recently underlined that they wished to increase the pace of rate hikes and give top priority to fighting inflation, despite weakening economic activity. Valuations in many equity markets now look attractive again, but this is mainly a long-term argument (for buying). We still see no improvement in economic indicators and earnings estimates, which would be a prerequisite for a short-term (tactical) overweighting in equities. Another important precondition for an overweighting of equities would be a decision to end monetary policy tightening in the foreseeable future. At present, however, it appears that even more restrictive monetary policy lies ahead, as long as inflation remains excessively high while economic activity and the labour market in particular still look relatively robust.

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Outlook – Regional equity markets Selective tactical overweighting and underweighting 200

Performance of EM equities

159.0

150

100

50.5

50

0

Within the equity markets, in the wake of the latest trends we expect to see countermovements over the short run: We reduce the overweighting in the North American market and in return change the underweighting in Europe to a mild overweighting. Within Europe, however, we maintain the underweighting in Germany as one of the countries impacted most severely by the interruption of gas supplies. The Emerging Markets (EM) remain underweighted. At the sector level, we do not have any specific overweightings or underweightings in September.

2012

9/2022

MSCI Emerging Markets TR EUR

Relative Performance MSCI EM vs. MSCI World Source: Bloomberg Finance L.P., Raiffeisen KAG

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

less attractive

Corporate and EM bonds

Government bonds

attractive

In November of last year, our equity model generated a buy signal for EUR equities. In return, we reduced our position in US value stocks. We exploited the low prices at the end of February to boost holdings of Japanese and EUR shares. As a result, we raised the equities allocation to roughly 27% overall.

less attractive

attractive

We used the steep yield increase up until mid-June to partially unwind our interest rate hedges for EUR corporate bonds. Nevertheless, we still prefer non-EUR government bonds and recently made purchases in Australian ten-year maturities. On the whole, however, we maintain a much lower-than-average positioning.

less attractive

attractive

In May, we opened an initial position in Italian government bonds, which we then increased in midJune (at yield levels of around 4.2% in the ten-year segment of the maturity curve). In the first week of July, risk premiums on EUR corporate bonds reached levels that justify a higher weighting. In accordance with this, we also shifted to an above-average position here as well.

Real assets

less attractive

attractive

We used the strong performance of inflation-sensitive assets (duration-hedged inflation-protected bonds, cyclical commodities, inflation-sensitive shares and currencies) in H1 2022 to further reduce this position. Thus, the position in this segment was re­duced to a below-average level.

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

Source: Raiffeisen KAG August 2022; this forecast/estimate is no reliable inference to the future performance.

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Tactical Asset Allocation September 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). Neutral weighting

Equity weighting

Maximum underweighting

±0 vs. previous month

Maximum overweighting

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

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Economy: Leading indicators still weak, mounting likelihood of recession; inflation far too high and still on the rise in the euro area; central banks confirm clear policy of more rate hikes orporate sector: Reporting season for Q3 2022 C better than anticipated; momentum for earnings growth from the energy sector in particular; revisions continuing to head lower at the global level I nvestor sentiment: Bear market rally resulted in a significant decline in risk aversion over the short run; however, investor sentiment remains dented in general; mostly defensive positioning echnical analysis: S&P turned south again at T the downward trend line; unable to break through the falling 200-day line; technical situation confirms continuation of bear market opics: Central banks: Faster, longer interest rate T hikes; geopolitics (war in Ukraine): more inflation, less growth; risk of a gas crisis in Europe; in China, COVID problems as well ositioning: Equities underweighting 3 steps vs. P euro money market, vs. US money market, and vs. short-dated US government bonds (new); overweighting commodities vs. bonds (new)

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Indicators Overview of market development Equity indices

31.08.2022

Diff. YTD

in local currency %

Diff. YTD

5 years p.a.

in euro %

in euro %

Bond yields

31.08.2022

Diff. YTD

10Y, in %

in BP

MSCI World

2,627

-14.80

-7.00

11.50

USA

3.19

168

Dow Jones

31,510

-12.00

-0.50

13.70

Japan

0.23

16

Nasdaq 100

12,272

-24.40

-14.50

20.50

UK

2.80

183

3,517

-16.30

-16.30

3.00

Germany

1.54

172

DAX

12,835

-19.20

-19.20

1.30

Austria

2.18

209

ATX

2,899

-22.10

-22.10

1.00

Switzerland

0.84

97

Nikkei

28,092

-1.30

-7.50

8.10

Italy

3.89

272

Hang Seng

19,954

-12.50

-1.70

-0.20

France

2.15

196

994

-12.50

-6.70

4.00

Spain

2.74

217

Euro Stoxx 50

MSCI EM Exchange rates

Money market rates

USA

3.08

287

Euro zone

0.65

123

1.30

UK

2.52

225

5.60

3.00

Switzerland

0.21

93

39.50

2.40

Japan

-0.01

6

4.10

2.50

Key rates of central banks

in %

in USD %

in euro %

in euro %

USA - Fed

2.50

225

1,711

-6.50

5.80

9.00

Eurozone - EZB

0.50

50

18

-22.80

-12.70

4.00

UK - BOE

1.75

150

7,846

-19.50

-8.90

6.70

Switzerland - SNB

-0.25

50

96

23.60

39.70

16.80

Japan - BOJ

-0.10

0

EUR/USD

1.01

13.10

3.40

EUR/JPY

139.70

-6.30

-1.30

EUR/GBP

0.87

-2.70

EUR/CHF

0.98

EUR/RUB

61.25

EUR/CNY

6.93

Commodities

Gold Silver Copper

3M, in %

Crude oil

Source: Bloomberg Finance L.P., 31 August 2022, YTD = change compared to previous year-end; past performance is not a reliable indicator for future development.

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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 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 issue premium and any applicable return fee 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.

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can be found in the key investor document (key investor information) 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, the information for investors pursuant to § 21 (Alternatives Investmentfonds ManagerGesetz, AIFMG) and the Key Investor Documents (Key Investor Information) for the funds of Raiffeisen Kapitalanlage-Gesellschaft m.b.H. may be obtained from www.rcm.at under the heading "Prices & Documents" (For some funds, the Key Investor Documents are also available in English). Where units are sold outside Austria, these documents may also be obtained from www.rcm-international.com under the heading "Prices & Documents" in English (and possibly also in German) or else in your national language. A summary of investors rights is available in German and English under the following link: https://www.rcm.at/corporategovernance Note that Raiffeisen Kapitalanlage-Gesellschaft m.b.H. may decide to terminate the arrangements for the distribution of the fund unit certificates outside the fund domicile country Austria. Imprint: Media owner: Zentrale Raiffeisenwerbung Publisher, produced by: Raiffeisen Kapitalanlage-Gesellschaft m.b.H., Mooslackengasse 12, 1190 Vienna

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Partner- and Memberships

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Contact

Raiffeisen Capital Management is the umbrella brand for: Raiffeisen Kapitalanlage GmbH Raiffeisen Immobilien Kapitalanlage GmbH Raiffeisen Salzburg Invest GmbH Mooslackengasse 12 1190 Vienna, Austria Photo: David Sailer

t ⅼ +43 1 711 70-0 f ⅼ +43 1 711 70-761092 e ⅼ info@rcm.at w ⅼ www.rcm.at www.rcm-international.com

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