What happened in the last month?

In focus: electoral rollercoaster in Europe

The world

European stock markets have been on an emotional rollercoaster of late: despite the fact that the current majority coalition in the European Parliament – the centre-right European People’s Party (EPP), the centre-left Socialists and Democrats (S&D) and the liberal Renew group – held onto its leadership position, the gains made by far-right parties in two of Europe’s leading powerhouses, France and Germany, caused a massive surprise. The success of political formations traditionally seen as undemocratic and therefore as potentially anti-market caused a minor alarm among investors: the euro, as well as leading European bond markets and stock markets, weakened significantly on the news. This turned out to be a good buying opportunity into the continental bond and equity markets, as both company results and macroeconomic indicators are showing improvement, and in France, the far-right failed to win a majority in the early elections held on 30 June, contrary to initial fears. Markets have since settled down somewhat, and both the stock markets and the euro have strengthened again.

Hungary

The political uncertainty surrounding the elections has not left Hungary unscathed: because investors acted as they usually due at such times and reduced their risk exposures, the forint as well as assets denominated in forint have been on a minor rollercoaster ride of their own.

Equity market news

We believe it’s worth being cautious on US stocks for the time being. The US economy is performing less well than expected, consumption data is weak and a soft landing remains the most likely scenario for the economy. At first glance, the S&P 500 index would suggest the New York Stock Exchange is on a virtually unstoppable upward trajectory, but a glance behind the numbers shows that this rise is only due to a few huge companies linked to artificial intelligence (such as chipmaker Nvidia). We think the optimism we’ve seen in these companies, which are still effectively in monopoly positions, is not warranted even though their revenues and profits are in most cases growing: when rivals do finally enter the market, competition will set in and investors will be forced to come to their senses. The Russell 2000 Index, which better reflects the state of the US economy as a whole, has been flat since the beginning of the year.

At the same time, European stock markets are looking decidedly cheap: if we compare corporate earnings to share prices, equities are trading at an average discount of almost 25%. This was partly due to the political uncertainty surrounding the European elections that we have already mentioned, though this mainly affected the Paris stock exchange. However, most listed French companies are global players (such as Danone, L’Oreal and Renault) that are largely immune to the vicissitudes of domestic politics, and the far right did not, after all, win a majority in the new parliament. As these concerns fade, stock markets should rise.

Bond market news

The Central European bond market is currently attractive investment targets for several reasons. Firstly, investors have high hopes for the new, pro-European Polish government, not least due to its chances of securing EU funds. Secondly, the interest rate premium of high-yield US corporate dollar-denominated bonds relative to government bonds has begun to decline (in the developed world, investors have made a lot of money on these), and this could lead to an appreciation of – higher-yielding, emerging market – government bonds.

There is now also a broader array of emerging market bonds that represent good potential investments. Government bonds from Asia and Latin America generally offer higher yields (albeit at the cost of higher risk), and their prices tend to follow the US bond market. In other words, their yields are also likely to start to fall soon (meaning that their price should rise), but at a higher rate than in the US, meaning that investors can earn more by holding them.

Alternative investments news

Gold continues to be attractive. In the first half of June, after a temporary dip, gold was trading at close to its historic high again, at around $2,400 an ounce. The latest US employment data showed that the labour market is becoming less tight and that jobless numbers are rising. As a result, there is no pressure for companies to raise wages, inflation may fall, and the long-awaited interest rate cut may finally soon be here. This could increase the demand for gold and thus cause its price to rise, as a fall in rates reduces the opportunity cost of holding non-yielding gold relative to bonds or stocks.

 

What can we expect in the coming period?

Investment outlook

Investment clock*

Based on an analysis of the latest data, the global economy is still in an expansionary phase. This phase, on the one hand, favours the commodities market according to our model. But on the other hand, due to the rising prices of commodities (and services), global inflation is likely to remain high for the long term, as our model had already predicted last month.

Compared to the previous period, the global Investment Clock has moved back round towards Recovery, with the new outlook favouring equity investments in particular. Economic growth appears stable, while the outlook for inflation is that it will continue to fall, mainly due to a temporary drop in oil prices. Looking more closely at the major regions of the globe, the business cycle in the US is also moving towards recovery, with improving business confidence (especially in the service sector) offsetting the negative impact of sustained tighter monetary policy. In Europe, the situation is similar: the Investment Clock remains in Recovery territory and economic growth has improved slightly, although inflation did rise slightly in May. China, however, continues to show signs of recession, with government stimulus programmes so far failing to improve the growth picture and the real estate sector still struggling to emerge from a prolonged crisis.

Source: VIG AMHU, based on data as at 8 July, 2024

The clock indicator denotes the current economic cycle phase. Faded indicators reflect the previous situation.

OW: Assets expected to perform well in the given period.

N: Assets expected to perfom less well in the given period.

UW: Assets expected to perform poorly in the given period.

 

Tactical Asset Allocation

The weights indicate the evaluation of the respective country, region, and asset class, providing a basis for portfolio managers in structuring portfolios and establishing positions, thus helping to capitalize on market opportunities.

Weights:

Changes – change compare to the the previous month

The table was prepared based on our investment clock and quadrant modell**.

 

Focus funds

VIG Maraton ESG Multi Asset Investment Fund

The Fund ended June with a positive return. The biggest contributor to performance was our developed market equity exposure, including Apple, which we managed to buy into the portfolio before the announcement of their AI ambitions at the Wordwide Developer Conference at the end of May. In addition, our exposure to Polish and Hungarian stocks within the CEE region also added to performance. In terms of bond exposure, German green government bonds and our corporate bonds in the region were the biggest contributors to performance. The Fund’s equity exposure remained around 20% for the month, currently focused on the Central European region. For bonds, the Fund’s risk exposure is also low, but increased somewhat during June, while unhedged FX exposure was 23% of the Fund at the end of the month.

VIG Central European Equity Investment Fund

The main event in Hungarian markets was the HNB’s June interest rate decision, with analysts expecting the last rate cut. As expected, the rate was cut by 25 basis points, which temporarily strengthened the forint, but it remained volatile throughout the month. Although business confidence remained weak, the BUX index performed well and consumer confidence improved slightly, giving rise to optimism in the retail sector. The exchange rate of the forint came under pressure, partly due to the impact of political events in France and partly due to domestic inflationary concerns. In the bond markets, demand for government bonds was stable, as investors can obtain real yields in forint terms.

The Fund ended June higher, with Polish, Hungarian and Romanian equity markets in particular outperforming and closing in positive territory, while Austrian and Czech equity indices ended the month lower. Polish cyclical sector stocks (including banking and oil) were outperformers, but the 4 Hungarian blue chips also performed very strongly. The Fund slightly underperformed its benchmark, although it continues to outperform for the year as a whole. Relative performance was boosted by an overweight to Polish and Hungarian markets, but reduced by our overweight to Polish retail consumption and underweight to some utilities companies. The Fund had an average equity exposure in June that was 10% higher than the benchmark index. At the country level, we are overweight Polish and Hungarian markets.

VIG Developed Market Short Term Bond Investment Fund

French President called a snap parliamentary election after very weak results of the EU elections (the first round was held on 30 June and the final in a week after). The EU is about to impose additional tariffs on electric vehicles from China of 17-38% on top of an existing 10% tariff. The European Commission announced it intends to open excessive deficit procedures for seven countries, including France, Italy and Hungary. Eurozone PMIs for June came in below expectations and US retail sales for May surprised to the downside. The German Ifo disappointed as business expectations recorded their first decline in five months. The incumbent, US President Joe Biden, performed poorly in the first presidential debate. The SNB decided to cut its policy rate by 25bp to 1.25% at its June meeting, while the BoE and Norges Bank kept their monetary policy on hold. The Fed remained on hold, while Fed Chair Powell downplayed the importance of the change in the median dot, which indicates just one rate cut in 2024, from three previously. US CPI inflation surprised to the downside, with monthly core inflation the lowest since August 2021. US inflation data pushed the 10Y UST yield 20bp lower, and this also affected core EGBs. Political developments sent OAT-Bund spreads wider and contributed to the underperformance of European equities relative to their US peers, which marked new highs. EGBs and USTs mostly trod water amid a light data agenda and ahead of key releases and political events over the coming weeks. European corporate credit risk premiums moved within a very narrow range, and European stock markets traded sideways. The euro and sterling remained sluggish. USD-JPY hit new multi-year highs above 161. We adjusted Italian, Spanish, French and Portuguese positions without meaningful changes of positioning as well as switched some part of EU exposure into Austria, amid stayed positive with a tactically cautious bias towards asset class overall.

 

ESG theme of the month: a just transition

Those of you who are familiar with the term ESG (Environmental, Social and Governance) will probably
also know that there are international objectives for the reduction of carbon emissions (as set out in the Paris Agreement).

To be precise, Europe wants to be carbon neutral by 2050 and the European Commission has set out a
roadmap for how to get there in its European Green Deal, presented in December 2019. Several plans are already in place and underway to achieve this, but the problem cannot be solved in isolation, by focusing only on achieving the objective, as the inevitable phasing out of coal mining and fossil-fuel burning will bring fundamental changes to the market and will affect regions dependent on mines and power plants more than others.1 The principle of a just transition states that “greening the economy [should be achieved] in a way that is as fair and inclusive as possible to everyone concerned, creating decent work opportunities, and leaving no one behind. This involves maximizing the social and economic opportunities of climate action, while minimizing and carefully managing challenges, including through effective social dialogue between all affected groups and respect for fundamental labor principles and rights”2 – International Labor Organization (ILO). Here’s a look at what this means in practice!

First of all, we need to be clear on what exactly carbon neutrality means. There’s a difference between carbon neutrality (net zero) and zero carbon emissions. In fact, carbon neutrality does not mean zero carbon emissions, but a balance between the amount of carbon dioxide emitted and the amount of carbon dioxide removed from the atmosphere and stored in carbon sinks. Any system that absorbs more carbon than it releases is called a carbon sink. The main natural carbon sinks include soil, forests and oceans. Another way to reduce emissions and achieve carbon neutrality is to offset the emissions produced in one sector by reducing them somewhere else. This can be achieved through investments in renewable energy, energy efficiency or other clean, low carbon technologies.
The EU Emissions Trading Scheme (ETS) is a good example of carbon offsetting. Another example of promoting emission reductions is the carbon border adjustment mechanism and the associated carbondioxide emission fee (or CBAM liability as it is known). If goods are imported from a country with less stringent environmental regulations than the EU, a carbon fee will be paid by the importer to ensure that the imports are no cheaper than the goods would have been had they been produced under the stricter EU regulations.3 In short, therefore, the target for 2050 is that all EU countries should not emit more carbon dioxide than they absorb, whatever form that absorption takes.

While this will almost certainly mean many jobs will be lost, the principle of a just transition has been included alongside the carbon reduction targets to ensure that people who currently work in high-carbon sectors will not be disadvantaged. The process is currently at the point where the European Commission is researching and analysing the employment, skills-related, social and distributional aspects of the green transition, as well as changes that it is likely to bring in the geopolitical environment and in terms of energy price increases, to inform evidence-based policy making. The Commission
is also conducting research in other key areas such as climate change adaptation, just resilience and transport poverty.4

The process needed to achieve carbon neutrality has therefore begun and will be implemented in a way that is reassuring for all, in line with ESG considerations, through an integrated approach, applying the principle of a just transition.

1 https://www.isfc.org/hu/just-transition
2 https://www.eurofound.europa.eu/en/european-industrial-relations-dictionary/just-transition
3 https://www.europarl.europa.eu/topics/hu/article/20190926STO62270/mit-jelent-a-karbonsemlegesseg-es-hogyan-erheto-el-2050-ig
4 https://ec.europa.eu/social/main.jsp?catId=1587&langId=hu

 

*The first version of the Investment Clock was introduced by the American bank Merrill Lynch, and the current model is an enhanced version by VIG Fund Management. The model indicates which phase of the global economic cycle we are currently in. Our portfolio managers utilize forward-looking indicators for both growth and inflation to identify the expected behavior of the economy and investment assets accordingly.

**The Quadrant model helps identify the best-performing investment target markets. The Quadrant combines tools of fundamental and technical analysis and takes into account the macroeconomic situation, valuation metrics, technical analysis, as well as sentiment (both longterm and short-term influencing factors).

 

Disclaimer

This is a distribution announcement. In order to make well-founded investment decisions, please inform yourself thoroughly regarding the Fund’s investment policy, potential investment risks and distribution in the Fund’s key investment information, official prospectus and management regulations available at the Fund’s distribution outlets and on the Fund Manager’s website (www.vigam.hu). Past returns do not predict future performance. The future performance that can be achieved by investing may be subject to tax, and the tax and duty information relating to specific financial instruments and transactions can only be accurately assessed on the basis of the individual circumstances of each investor and may change in the future. It is the responsibility of the investor to inform himself about the tax liability and to make the decision within the limits of the law. The information contained in this leaflet is for informational purposes only and does not constitute an investment recommendation, an offer or investment advice. VIG Asset Management Hungary Closed Company Limited by Shares accepts no liability for any investment decision made on the basis of this information and its consequences.