Capital market commentary from Karin Kunrath, Chief Investment Officer of Raiffeisen KAG
As the military operation drags on and with every additional US casualty, both pressure on the administration and domestic criticism are mounting, particularly as US opinion polls have shown the war to be overwhelmingly unpopular from the outset. And with each passing day of the war, the costs of the military operation continue to rise, putting further pressure on an already severely strained federal budget.
Furthermore, fuel prices at US petrol stations have also risen noticeably, and Americans’ sensitivity to this issue should not be underestimated. The security of US energy supplies, however, is less of a concern because the country is now effectively energy self-sufficient, unlike many other regions of the world. Higher fuel prices not only dampen consumer sentiment, which is so important to the US economy, and squeeze profit margins in many sectors, but also undermine the effects of the tax cuts that have been introduced.
The longer the war drags on and the more its negative consequences are felt in the US, the more likely it is to influence the outcome of the midterm elections in November. From a global perspective, the war is straining US relations with its regional allies, particularly as the Gulf states are being hit much harder and more directly than many had likely anticipated. This is due partly to the numerous Iranian retaliatory strikes and partly to the considerable economic impact of severely disrupted energy exports, as well as the pressure on local logistics, aviation hubs and tourism.
Furthermore, many Asian countries, like Europe, are also severely affected because they are highly dependent on oil imports from the Middle East. The risk of fertiliser shortages should not be underestimated either, as a significant share of global fertiliser exports also passes through the Strait of Hormuz, along with various second-round effects resulting from high oil and gas prices. It is therefore hardly surprising that stagflation fears are resurfacing, with the combination of economic stagnation and rising inflation weighing on capital markets.
Overview of asset classes
Inflation concerns remain the key driver of global yield trends
We continue to favour French and German government bonds and remain cautious on Italian and US government bonds. We also continue to view Australian government bonds as offering good opportunities. Global inflation concerns remain the key driver of global yield trends and, for the time being, still significantly outweigh concerns about growth.
Contagion risks still (!) manageable
We remain defensively positioned in corporate bonds, particularly with regard to US high-yield corporate bonds and EUR investment-grade corporate bonds. In addition to the current geopolitical shock in the Middle East, growing problems in the private credit and leveraged loan markets also have the potential to disrupt refinancing in the corporate bond market. Contagion risks still appear manageable, but if they cease to be so, it may already be too late to become more cautious.
Emerging market bonds have held up comparatively well.
Despite the events in Iran and the associated impact on the energy market and general risk aversion, emerging market bonds have held up comparatively well, with risk premiums rising only moderately. We have already been cautious regarding emerging market hard-currency bonds in recent months and are continuing to reduce this exposure moderately.
Developed equity markets are, on the whole, very resilient.
News regarding the war in Iran is currently dominating market developments. Despite the potential impact on economic growth and inflation, international equity markets have, on the whole, remained very resilient. In this environment, central banks will postpone interest rate cuts or may even respond with rate hikes. We are therefore reducing our equity allocation by a further step and are now neutrally positioned.
Emerging market equities suffered setbacks.
Emerging market equity markets were unable to escape the broader market correction triggered by the war in Iran and suffered setbacks both in absolute terms and relative to developed markets. However, provided the conflict does not drag on for too long, we view this correction as merely temporary. Valuations for both emerging markets as a whole and for individual countries are more attractive than in many other regions and point to stronger earnings growth.
Consolidation in precious metals
International commodity markets have recently been mixed. Following an exceptionally strong performance in precious metals over the past few months, there has recently been a period of consolidation. Energy commodities naturally reacted particularly strongly to the war in Iran. It is currently impossible to predict what the medium-term consequences on the supply side will be. It is clear, however, that a significant short-term risk premium has already been priced in.