market view of Raiffeisen Capital Management, July 2022, Retail

Page 1

marketview

07/22


Introduction Upcoming reporting season to be particularly exciting Of course, every reporting season is exciting and crucial for the development of the market going forward. However, the reporting season for Q2 2022, which starts from mid-July, may attract special attention, because so far companies appear to have hardly been impacted by the poor leading macro-economic indicators that have been seen for quite some time now. While the negative effects of inflation were discussed more by companies and some mild declines in profit margins were reported for the first time during the last reporting season, positive surprises still maintained the upper hand in comparison to the analysts’ estimates. In line with expectations, the second quarter will feature the lowest rate of earnings growth in more than a year. Nevertheless, gains are still anticipated both in turnover and profit figures, and this should apply not only for the past quarter but for the quarters

to come as well. Moreover, this comes at a time when there is far more serious discussion about an impending recession due to the known challenges and uncertainties. Consequently, in the weeks ahead market participants’ attention will likely be focused more sharply than usual on whether companies are able to live up to the still-optimistic expectations, despite the difficult conditions. While the reporting season was preceded by some profit warnings by company heads, on the whole there are still no signs of a broad-based downturn in corporate profits. Thus, it is possible that the reporting season will offer at least some temporary support for the equity market once again. However, if the reports and/or the outlooks are disappointing, the bear market will likely continue unabated. Our positioning is cautious, and we remain underweighted in equities.

In line with expectations, the second quarter will feature the lowest rate of earnings growth in more than a year

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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: massive swings in June Year to date Month on month

-6.7% -6.8%

-2.1 -1.8

-11.3%

-1.0

-14.4%

-2.0

-3.3

-21.3% -10%

Italy sovereigns

EM corporates

UK sovereigns EM hard currency

-6.5 -15%

Germany sovereigns

Euro high yield

-7.3

-16.7%

EM local currency

Euro corporates

-3.6

-15.5%

USA corporates USA high yield

-4.6

-10.9%

-12.4%

1.5

0.0

-7.0%

-20%

USA sovereigns

-0.9%

-5%

0%

5%

June also featured more price declines for almost all of the bond markets. As a result, losses of more than 10% have been already been registered for many bond classes for the year-to-date. These are declines on a scale that is familiar from developments on the equity markets, with an intensity that is only seen every couple of decades. Fortunately, this kind of steep, broad-based increase in yields is a rare event. The loss registered for June is far less massive than the actual volatility that was seen during the month: For example, yields on ten-year German government bonds advanced to 1.75% by mid-June, before falling back to around 1.25% by the end of the period. In the case of Italy, levels of around 4.3% were even reached (with a reversal to 3.2%). The USA was the only country where the decline in yields towards the end of the month was able to offset the yield increase from first half of the month. In league with the further appreciation of the US dollar, US government bonds were thus the only bond class which closed with a monthly gain.

Returns in EUR Source: Bloomberg Finance L.P., Raiffeisen KAG, 31 Dec 2021 – 30 Jun 2022; as of: 30 Jun 2022

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Equity market conditions Stock markets weak yet again Latin America

-15.0

-3.5%

Year to date Month on month

-7.2%

-2.5

-10.4%

-4.3

-13.5%

-6.4

-13.8%

-5.9

-17.9% -19.5% -22.9%

-8.8

Asia EM Global MSCI World

Nikkei Euro STOXX 50 DAX

-11.2

ATX

-12.7 -20%

9.2

MSCI Europe

-7.7

-14.7%

China

Dow Jones Industrials

-4.3

-9.9%

8.2%

-10%

0%

10%

The relative outperformance of the Chinese equity market since the beginning of the year (on the heels of a major slump in 2021) was actually strong enough in June for an absolute increase in prices, making China the only larger stock exchange with positive performance in the previous month. Otherwise, the monthly performance figures for almost all stock exchanges were once again deep in negative territory for June. Stock markets in Central Europe led the list of losers, likely due to the mounting risks to gas supply and the resulting economic damages for this region. Generally speaking, during the month investors’ sentiment moved beyond worries about inflation and interest rates and gravitated towards concerns about a recession. Consequently, most of the major indices ended the month near their previous lows for the year. The US stock markets dominated by the tech sector and growth shares in particular (at the epicentre of this year’s equity market slump) actually dropped well below their previous annual lows.

Returns in EUR Source: Bloomberg Finance L.P., Raiffeisen KAG, 31 Dec 2021 – 30 Jun 2022; as of: 30 Jun 2022

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Market conditions for commodities and currencies Rouble appreciation looks more and more extreme RUB BRL

5.9%

USD CNY

0.9%

CHF

0.8%

-0.3

-1.2% -1.5

-5.2%

-0.8

24.7%

3.2

-1.8 -2.7

27.1%

12.2

Year to date Month on month

GBP JPY 0%

Energy

10%

20%

95.9%

8.4

13.7%

Industrial metals -8.2

4.3%

Precious metals -5.9

0%

40%

80%

Returns in EUR Source: Bloomberg Finance L.P., Raiffeisen KAG, 31 Dec 2021 – 30 Jun 2022; as of: 30 Jun 2022

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Fears of a recession also began to have a greater impact on the commodities markets during the second half of June: Of the three major commodity classes, only energy is still in positive territory for the year-to-date (but with a whopping increase of around +70%, this is still enough to maintain inflation rates at record-high levels). Even the price of oil dropped off from around 120 USD at mid-month to around 110 USD at the end of the period. As usual, however, worries about economic activity slammed industrial metals, many of which have conceded their gains for the year again (for example, copper has hit its lowest level since February 2021). Surprisingly, the gold price has also been unable to benefit from the mounting economic worries and continues to trade at levels from before the start of the war in Ukraine. In this regard, the persistently high (US) interest rate expectations appear to be keeping a lid on upside price developments. Turning to currency developments, the US dollar continued to appreciate modestly versus the euro, and against the very weak yen (for lack of any outlook for rate hikes). A surprisingly early interest rate hike also paved the way for the Swiss franc to strengthen. Once again, the strongest appreciation was registered for the Russian rouble (amidst high commodity revenues and capital controls that prevent outflows of funds). marketview ⅼ July 2022 ⅼ 6


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

5.7%

2.6% 2.2%

2021 2022 2023

2.6% 2.0%

2021 2022 2023

Eurozone

8.1%

2021 2022 2023

4.7% 0.8% 1.5% 2021 2022 2023

2021 2022 2023

Africa

Brazil 5.8%

-1.5%

Japan

China

8.7%

India

2023

-10.2%

4.7% 5.2%

USA 4.0% 3.3% 3.4%

2021

2022

2021

7.4%

1.7% 1.9% 1.8% 2021 2022 2023

6.5%

2022 2023

3.3% 3.3%

2021 2022 2023

World

Source: Bloomberg Finance L.P., as of: 30 June 2022

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Outlook – Global economy Economic slowdown gains momentum 70

60

55.3 51.9 51.2

50

Economy – leading indicators, comparison (PMI Composite)

40

30

7/2020 USA PMI

7/2022 EUR PMI

China PMI

The major leading indicators continued to weaken in June, and there is no turnaround in sight. In some countries (such as Germany, for example), declines in production in the manufacturing sector are now anticipated. By contrast, the larger services sector is still benefiting from the post-coronavirus rebound. That said, dynamics here are also weakening, due to income-eroding effect of the high energy prices. China alone continues to show a time lag in its economic cycle, as production there is bouncing back strongly with the end of the latest lockdown measures. At the moment, the supply chain problems at the global level are improving significantly. However, in many countries (in particular the USA), there are worries that the sharp increases in interest rate levels will be next negative factor. Right now, a recession in the USA is not the most likely scenario (in 2023 as well). In contrast to this, the risk of a recession in the quarters ahead is considerably higher in the euro area: An interruption of natural gas supplies would make this almost unavoidable. In recent weeks, the risk of this materialising increased sharply again.

Source: Bloomberg Finance L.P., Raiffeisen KAG

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Outlook – Inflation and central banks First ECB interest rate hike since July 2011 10.0

8.6% 8.6% 8.6%

8.0

New peak in inflation

6.0

4.0

2.0

0.0

-2.0

-4.0

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

7/2022

Inflation rates around the world reached new highs in June, driven by the persistently sharp increases in energy prices. With a rate of 8.6% yoy, the euro area has now caught up to the USA, albeit core inflation in the euro area is still considerably lower, at 3.7%. While supply chain problems have eased significantly at the global level and the oil price stopped rising recently, energy supply bottlenecks in Europe will probably keep up the inflationary pressure for some time to come. In light of this, the ECB will raise its interest rates for the first time in July, with more hikes to follow by the end of the year: By next year, the euro yield curve is now pricing in a peak interest rate of around 2%. Considering the sharp downturn in economic activity and the growing risks of a recession in Europe, we are sceptical that this level will be reached in 2023. By contrast, interest rate hikes are moving full steam ahead in the USA: The next hike to 2.5% is likely to come at the end of July, and the market is already pricing in further increases to almost 4% for 2023.

Source: Bloomberg Finance L.P., Raiffeisen KAG

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Outlook – Equity markets Bond market: Will prices stop falling? 210

196 170

130

90

60

7/2021

For some bond classes, yields have now reached quite interesting levels, due to the sharp increase in expectations for key rates and thus also for bond yields that was seen in the first half of the year. If economic performance continues to taper off and inflation begins to head lower as expected, this opens up opportunities for prices to rebound, along with reasonable returns. We thus remain strongly overweighted in corporate bonds. Within this segment, however, we shift the focus to higher quality issuers (IG), including financials, at the expense of HY issuers. In particular, the latter would be much more strongly impacted in the event of a recession. In terms of countries, we have a new overweighting in US government bonds versus Germany (exactly the opposite compared to last month) and a tactical overweighting in Italy versus Germany and France.

7/2022

Credit spreads EUR IG (bp)

Source: Bloomberg Finance L.P., Raiffeisen KAG

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Outlook – Global equity markets Previous underweighting in equity markets remains in place 50

40

Estimated earnings growth (next 12 months), in %

30

20

9.6% 9.4% 8.1%

10

0

-10

7/2020 Europe

7/2022 USA

Source: Bloomberg Finance L.P., Raiffeisen KAG

Raiffeisen Capital Management

Japan

After more declines for equities in June, investor sentiment has now reached extremely negative levels (contrarian indicator!). In the past, this has often led to brief rebounds. Another positive point is that interest rate expectations are now very high and should be mostly priced in on the equity market as well. The main worry now is the deceleration in economic activity, and we expect to see this situation deteriorate significantly in the months to come. This applies both to the leading economic indicators and to the earnings expectations of global companies, which are too high in our estimation. With this, there is a risk of further declines in prices on the equity markets. Consequently, we maintain our short-term underweighting in the equity markets. Taking a one-year perspective, we see the potential for a recovery for practically all of the equity markets, in particular as they mostly now feature attractive valuations. Nevertheless, in order for there to be a change in our short-term underweighting, we would like to see a lasting turnaround in inflation (along with a reversal in interest rate expectations) as well as prospects for leading economic indicators and earnings estimates to finally bottom out.

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Outlook – Regional equity markets Selective overweighting and underweighting 0.55

0.50

Will the relative performance of the EM turn around? 0.45

0.40

0.39

0.35

0.30

1/2021

7/2022

Relative performance, EM equity market vs. developed markets

Source: Bloomberg Finance L.P., Raiffeisen KAG

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Within the equity markets, we essentially maintain our orientation in terms of countries: We expect a countermove to the current relative trends and are focusing on markets which have recently exhibited relatively better earnings revisions. In terms of valuations, however, we currently tend to favour cheaper markets. Broken down by individual regions, this means that we shift North America from overweight to underweight, and stay overweighted in Europe and underweighted in Pacific. We change the stance on the Emerging Markets (EM) from underweighted to overweighted. In this regard, China is the largest partial market, and the economic downturn that is currently a worrisome prospect for the West already took place there last year. This led to massive underperformance for the Emerging Markets in 2021. In the meantime, however, China’s economic performance has stabilised, economic policy is now expansive, and it appears that concerns about state intervention at major companies are subsiding. At the sector level, we take a very sceptical view of consumer discretionary for the immediate future and are underweighted in this sector, versus consumer staples amongst others.

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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. By contrast, 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-thanaverage 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 belowaverage level.

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

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

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Tactical Asset Allocation July 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

Economy: according to leading indicators, elevated likelihood of recession; initial signs that inflation has peaked in the USA; central banks focusing on inflation as long as the labour market remains solid orporate sector: so far, corporate earnings are C (still) stable, but there are some initial “warning” signs; Q2 reporting season should point the way for the development of earnings and margins – risks of sharp downgrades in the outlook I nvestor sentiment: extreme levels seen again for sentiment indicators (bull-bear ratio, etc.); investor sentiment is already quite negative by and large; positioning is also now very risk-averse echnical analysis: negative, downward trend; T daily/weekly countermoves do not change this opics: central banks: turnaround in interest rates T (and rising risks of a recession in the USA as a result of this); geopolitics (war in Ukraine): more inflation, less growth; possible gas crisis in Europe ositioning: underweighting in equities (2 notP ches) vs. EUR money market remains in place

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

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Indicators Overview of market development Equity indices

30.06.2022

Diff. YTD

Diff. YTD

5 years p.a.

in local currency %

in euro %

in euro %

30.06.2022

Diff. YTD

10Y, in %

in BP

USA

3.01

150

Bond yields

MSCI World

2,546

-18.30

-13.50

9.60

Dow Jones

30,775

-14.40

-7.20

11.90

Japan

0.23

16

Nasdaq 100

11,504

-29.20

-23.20

18.40

UK

2.23

126

3,455

-17.90

-17.90

2.50

Germany

1.34

151

DAX

12,784

-19.50

-19.50

0.70

Austria

1.93

184

ATX

2,879

-22.90

-22.90

1.70

Switzerland

1.07

120

Nikkei

26,393

-7.30

-14.70

5.60

Italy

3.26

209

Hang Seng

21,860

-4.80

2.60

1.60

France

1.92

172

1,001

-13.70

-10.40

4.00

Spain

2.42

186

Euro Stoxx 50

MSCI EM Exchange rates

Money market rates

USA

2.28

207

-0.20

38

1.67

141

Switzerland

-0.17

54

3.20

Japan

-0.03

4

3.00

2.00

Key rates of central banks

in %

in euro %

in euro %

USA - Fed

1.75

150

Eurozone - EZB

0.00

0

UK - BOE

1.25

100

Switzerland - SNB

-0.75

0

Japan - BOJ

-0.10

0

EUR/USD

1.05

8.50

1.70

EUR/JPY

142.26

-8.00

-2.00

EUR/GBP

0.86

-2.30

0.40

UK

EUR/CHF

1.00

3.60

1.80

EUR/RUB

57.37

49.00

EUR/CNY

7.01

Commodities

Gold

in USD %

1,807

-1.20

7.20

10.70

20

-13.00

-5.60

6.90

8,254

-15.30

-8.10

9.70

115

48.50

61.10

22.20

Silver Copper Crude oil

3M, in %

Euro zone

Source: Bloomberg Finance L.P., 30 June 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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