Not every comparison holds up
Market update by Karin Kunrath, Chief Investment Officer of Raiffeisen KAG
Capital market commentary by Karin Kunrath, Chief Investment Officer of Raiffeisen KAG
The string of reports from AI-heavy companies about enormous demand and the associated growth potential for technology for the implementation of corresponding 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. That is a result of the anticipatory character of the equity market.
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 widened considerably in the recent past, 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 do not really seem to be 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.
Overview of asset classes
Government bonds: Inflation rates still the main focus
Government bond yields did not move in any clear direction recently and trended sideways. Attention remains focused on the inflation rates. These are falling, but a return to the 2% inflation target in the near future is questionable. Which limits the room for manoeuvre of the central banks with regard to interest rate cuts.
Corporate bonds: Smaller high yield companies fighting with high interest rate levels
High yield corporate risk premiums rose on the credit markets last month while premiums for investment grade corporate bonds fell further. This is likely due to the fact that small high yield companies are facing increasing problems with the relatively high interest rate level and this bond class also features expensive valuations from a technical perspective. This is less the case with investment grade corporate bonds. We anticipate that the spread rally is not yet over here.
Emerging Markets: Not expected to decouple from risk premiums in developed markets
All in all, we do not expect to see EM bond spreads decouple from risk premiums in the developed markets. In technical terms, however, Emerging Market bonds are similarly expensive as high yield corporate bonds.
Positive conditions for the developed equity markets
International equity markets posted much stronger performance in recent weeks. Along with the better-than-expected economic data (especially in the USA), the equity markets were also supported by the robust reporting season in recent weeks. By contrast, the renewed rise in bond yields had almost no effect on the equity markets. Even though the risk of short-term setbacks is rising given the performance over the past weeks, we remain optimistic about equities in light of the positive overall conditions.
Emerging Market equity markets rose further
Equities in the Emerging Markets rose further in March. Nevertheless, they are continuing to post weaker performance than developed market equities. This is due in large part to the fact that the earnings momentum in this asset class is still very mixed. International investors are still positioning themselves very cautiously in respect of Emerging Market equities, though the valuation promises good earnings over the long term.
Commodity markets: Precious metals still very strong
The energy segment has been somewhat stronger in recent weeks, profiting from the geopolitical uncertainties and limitations on supply, but the extent of the gains has been very limited. Despite higher bond yields, precious metals managed to post further gains recently, whereas industrial metals remained weak.