Capital market commentary from Karin Kunrath, Chief Investment Officer of Raiffeisen KAG
What has actually changed sustainably in capital markets in recent years is the trend reversal toward deglobalisation (following decades of globalisation) and the new momentum in military rearmament. Despite all the disillusionment in light of some unfortunate developments, a head-in-the-sand policy is of no help. In a highly competitive environment, companies must make decisions on a daily basis — even under difficult conditions, which we undoubtedly face at present— in order to make the best of their respective circumstances. Only in this way can the business model be strengthened and market share in the respective industry be expanded, or at least the status quo be successfully defended.
In capital markets, key industry trends and changes can often be identified early on through relative (price) developments, as these are gradually priced in and thus, in a sense, anticipated. One example is the software sector as a sub-sector within the booming IT industry, where price weakness relative to the technology index and the broader market has already become apparent from autumn of last year. However, the disruptive AI effects on established software solution providers only became a widely discussed market theme — as the fundamental backdrop for the revaluation of these equities — months later, once the first low-cost alternatives from emerging AI agents became concretely foreseeable. The current hype surrounding semiconductor manufacturers as the main beneficiaries of massive AI infrastructure investments by so-called "hyperscalers" will also sooner or later give way to a new market theme and be reflected in relative price developments.
The gap between the AI boom and the economic impact of the conflict in the Persian Gulf has widened further recently. However, record profits in the technology sector have so far cushioned the burdens in other parts of the economy. Based on our fundamental market indicators, our positioning remains unchanged with a slight equity overweight.
Overview of asset classes
French and German securities in focus
We remain positive on French and German government bonds, while we are primarily cautious on US Treasuries. Australian government bonds also continue to be of interest to us. US Treasuries are only attractive to us in exchange for riskier bond assets (US high-yield bonds and emerging market hard currency bonds).
Priced-in risks likely to have bottomed out
US high-yield bond spreads have already widened by around 100 basis points this year, only to tighten again later, without any significant change in their fundamentals. We therefore see a bond class that is heavily driven by sentiment and newsflow. High-yield corporate bonds are not pricing in any significant default, credit, or liquidity risks. While equity prices can continue to rise in line with earnings growth, the risks priced into corporate bonds are likely to have found their floor.
Risk premiums near historic lows
Emerging market hard curre ncy bonds continue to perform strongly after a brief period of weakness at the beginning of the year, with their risk premiums trading near historic lows. Similar to equity markets, emerging market bonds are holding up exceptionally well compared to bonds from developed markets. Nevertheless, we believe that emerging market bonds are overbought and are currently cautious on this asset class.
Sentiment optimistic so far
Despite the persistently challenging news flow regarding the Iran war, international equity markets have performed very positively in recent weeks. The outlook for expected earnings growth likely provides the most important explanation for the firm equity markets. In this environment, central banks will postpone interest rate cuts or potentially even respond with rate hikes. In the short term, sentiment appears somewhat optimistic; given the support from the earnings side, we remain cautiously optimistic on equities.
Valuations comparatively attractive
Emerging market equities have also recovered from the sell-off triggered by the Iran war. The favourable relative performance compared to developed equity markets continues as well. This demonstrates that the Asian region is also an AI powerhouse of the world. Valuations of emerging markets — both in aggregate and individually — are more attractive than in many other regions and point to stronger (earnings) growth.
Price consolidation in precious metals
International commodity markets have recently presented a mixed picture. A strong start to the year for precious metals was followed by price consolidation in recent months. The risk premium in energy commodities has been partially priced out recently. In contrast, optimism about global growth has driven industrial metals higher.