What happened in the last month?

In focus: slowing US growth

 

In May, for the second straight month in a row and for the 18th time in the past 19 months, economic activity in the US manufacturing sector fell. Although the US economy is not performing badly, the overall weakening of demand is clearly reflected in the recent 3.7 percentage-point decline in the new-orders index. The slowdown in economic growth is also mirrored by an increasing number of forward-looking indicators: the Citigroup Economic Surprise Index has itself turned sharply negative, which means that key indicators have come out weaker than expected. Consumer spending is also stalling: it fell sharply in April in inflation-adjusted terms, with fuel sales showing the steepest decline. It’s perhaps no wonder then that the Atlanta Fed’s GDPNow forecasting model showed that the economy grew at an annual rate of only around 3% in the first week of June, while a month earlier it was above 4%. It seems, therefore, that there will be no overheating of the economy and that instead of a no-landing scenario (where the economy continues to grow despite contractionary monetary policies), the chances of a soft landing has increased again.

The most likely outcomes for the US economy

source: Bank of America

 

Equity market news

In May, the stock markets reached a new all-time high. So far, the old stock market adage that tells us to “Sell in May and go away” (meaning stock prices don’t do much during the summer months, so it’s worth selling our shares in May and then buying them back in the fall) has not been playing out. We also expected the correction in April to be bigger than it was (which is why we reduced our equity position to neutral), though it does finally seem that the “big positive trend” may have come to an end. The short-term rise we’re seeing now is again due to the AI sector: the reports of the seven leading US tech giants concerned (Nvidia, Meta, Tesla, Amazon, Alphabet, Microsoft and Apple) spoke of an overall 12% increase in earnings above expectations (whereas earnings at other companies were down 1% on average), and this gave another boost to their share prices.  However, some of the expectations investors have are overblown and will be hard to sustain: the price gains achievable on these stocks going forward are likely to fall, while that of others may well increase on the back of higher corporate profits, thus closing the gap between the two.

Central European stock markets are still notably cheap: shares on the Budapest Stock Exchange are trading at an average of less than seven times earnings, a quarter of the US price, a third of the French, and half of the German. For example, in the last quarter, the Hungarian oil company MOL put in a performance that the world’s largest oil companies such as Shell, Exxon, Chevron and Saudi Aramco were unable to achieve against a backdrop of weakening energy prices.

Bond market news

The current neutral situation could mark a good entry point in terms of the bond markets. The Fed, which performs the role of central bank in America, may choose to cut interest rates for the long term, and this may boost the value of bonds. At the start of June, the yield on the benchmark 10-year US dollar-based government bonds was around 4.5%, close to its peak in a decade-and-a-half thanks to the rise in inflation. Europe is also due a rate cut, but because of strengthening wage-side inflation pressure, only one cut is expected from the European Central Bank in 2024. Thus, the gap between American and European yields may also narrow.

Hungarian government bonds, too, promise high yields: the current long-term forint rate of around 7% means you can double your money in these bonds over approximately 10 years. Since long-term inflation is likely to average around 4-5% annually according to the latest forecasts, the real return figure will be more like 2.5% a year.

Alternative investments news

Investors do not appear to have confidence in the US central bank’s ability to achieve its 2% inflation target in the foreseeable future. And this may lead to price increases on the commodities markets: gold, copper, silver, but for example cocoa (which has already doubled in price this year), orange juice (which has reached a new high and is also traded on the New York commodities exchange) and coffee (currently at a multi-year high) should also perform well. In view also of the global economy’s current expansionary phase, we believe we are in a long-term commodities supercycle, which may run not just for a few months but for several years to come.

 

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.

In Europe, the jobs market may add further fuel to the price rise: in continental Europe’s largest economy, Germany, inflation in May was 2.4%, the first increase in six months. And wage hikes had the biggest role to play in this, with salaries rising a nominal 6.4%, or 3.8% once inflation is accounted for. This is the highest rise since 2008, when Destatis, the German Federal Office of Statistics, began compiling these statistics. As a result, the European Central Bank has less and less room any further rate cuts. Each region of the globe, however, is currently in a different phase: For now, America is somewhat overheated, Europe is in a recovery phase, and China is still showing signs of recession.

Source: VIG AMHU, based on data as at 8 June, 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 Central European Equity Investment Fund

The Fund ended May higher, with the Czech, Romanian and Austrian markets outperforming this time, while Polish and Hungarian equities were broadly flat over the month. The best performers this time were the retail sectors, with all companies in the sector (CCC, Pepco, Allegro, LPP) reporting improving margins and positive consumption trends. Rising electricity prices in Europe and the soaring global utilities sector led to a strong performance in this sector, as did mining companies, which rose in line with commodity prices. However, the banking sector was a weak performer and was the main reason for the underperformance of the Polish and Hungarian markets due to the sector’s large weighting. The Fund started the month with an equity weighting of over 110%, which was reduced slightly in the second half of the month as dividend payments were made. We intend to take advantage of the current correction in the banking sector to buy, while remaining optimistic on consumer-related sectors. At the country level, we are overweight the Polish and Hungarian markets.

VIG Emerging Market ESG Equity Investment Fund

The Fund returned 1% in May, in line with its benchmark. The Fund started the month underweight, but at the beginning of the month the improving technical picture led to an overweighting of the Fund, mainly through a rebalancing towards the major Asian countries (India, Taiwan, South Korea) and the CEE region, while maintaining an overweight in Turkey. On the other hand, the Fund remains underweight in Thailand, Malaysia and Indonesia. The neutral performance was due to the fact that while the Taiwan and Turkish positions performed well, the Korean overweight and the overall underweight at the beginning of the month hurt the performance. The Fund started the new month with an overweight against the benchmark.

VIG Smart Money Fund of Funds

Over the past month, all absolute return and total return funds in the portfolio posted positive returns. Equity exposure was the main contributor to performance and the Panorama fund benefited from rising commodity prices.

VIG MegaTrend Equity  Investment Fund

Equity markets continued to rise in May. The market rally remains highly concentrated, with the AI story at the forefront. Utilities have also rallied over the past month, alongside the IT and communications services sectors, as investors began to price in rising power demand in data centers. Nvidia’s latest quarterly results reinforced our view that AI could be one of the most influential technology megatrends of the decade. The most recent quarterly reporting season was once again dominated by the largest cap technology stocks, with the so-called Magnificent 7 (Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, Meta) outperforming. Their double-digit earnings growth was well above the market average, without which the S&P 500’s first quarter EPS growth would have been negative. The positive news did not go unnoticed, with the Nasdaq 100 reaching a new all-time high for the month, while small caps continued to underperform. AI remains the Fund’s most prominent theme, but we also have confidence in infrastructure, innovative healthcare and uranium exploration companies, and have started to rebuild positions in the renewable energy sector.

 

 

*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.