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The G20 summit had a difficult start at the end of June: The US and China officially put their trade negotiations on hold, the conflict over the nuclear agreement with Iran escalated again, and many questions regarding the Brexit remained unresolved. Rarely has the group of the 20 most important industrial nations, and by extension the world economy, had to face so many serious challenges simultaneously. Investors were not the only ones to look forward to the meeting’s start in Osaka, Japan.

Pleasant surprise in a tense environment

The weekend did indeed start with a breakthrough, but the good news came from an unexpected direction – not Japan, but rather Brussels and Buenos Aires: The European Union and the South American trade bloc Mercosur announced the formation of the world’s largest free trade zone. After 20 years of negotiations, a political agreement on abolishing tariffs and other trade barriers has been reached. Outgoing EU Commission President Jean-Claude Juncker spoke of a “historic moment”.

The agreement between the EU and Mercosur countries Argentina, Brazil, Paraguay and Uruguay is intended to strengthen the exchange of goods and save companies billions. The EU Commission estimates that the agreed treaty will save European companies EUR 4bn in customs duties.

Potential in commodity and capital markets

According to the Commission’s data, exports by EU companies to the four Mercosur countries amounted to around EUR 45bn in 2018, while exports in the other direction amounted to EUR 42.6bn. The EU is already the main trading and investment partner for Latin American countries. Mercosur mainly exports food, beverages and tobacco to the EU. From there, machines, transport equipment, chemicals and pharmaceutical products are exported to Argentina, Brazil, Paraguay and Uruguay. The two regions also engage in lively trade on the capital market: the cumulative volume of capital from the EU increased from EUR 130bn in 2000 to EUR 381bn in 2017. Conversely, in 2017 investors from the Mercosur states held investments to the tune of EUR 52bn in the EU.

Further steps and scepticism

Shortly after the “historical” agreement was published, resistance to it began to take shape. While sectors such as the automotive industry were satisfied with the planned changes, other industries such as farmers fear increased competition from beef, poultry and sugar from South America. With its less strict regulations for environmental protection, crop protection and the use of antibiotics, consumer protection agencies and environmentalists were quick to object: “France is currently not prepared to ratify the agreement,” a government spokeswoman said on the French radio last week. Before the agreement can be put into effect, all EU member states as well as the EU Parliament, among others, must approve it, which will most likely require renegotiations and additional agreements in some areas. Seen thusly, the largest free trade zone in the world has not yet reached its goal. However, the milestone of the agreement can be considered a positive signal in a conflict-laden environment.

Legal note: Prognoses are no reliable indicator for future performance.

The conditions on the capital markets have changed dramatically in the past five years. Time, therefore, to adjust the investment criteria of the YOU INVEST funds on the basis of an improved risk/return profile. The recent re-positioning is aimed at the sustainable increase in portfolio return in an environment of extremely low interest rates and low inflation.

What’s new? 

• No minimum quota for investment grade government bonds
• Given a neutral market assessment, the equity portion is now higher
• The portion of alternative investments remains at 10%
• Additional asset classes such as convertible bonds and commodities (gold, industrial metals etc.) are now also part of the YOU INVEST funds

Trust in stable economy and positive earnings development

The positive development on the equity markets since the end of December 2018 continued in April and lasted until mid-May. Company results and the prospect of a stable economy were the main drivers, complemented by the fact that the US central bank had been restrained in its interest rate moves and deliberations. The important S&P 500 and Nasdaq Composite indices set new highs in April. The economic data in China were also supportive. Higher inflation is not an issue on either side of the Atlantic.

Risks to be aware of

The trade conflict between the USA and China is still the Sword of Damocles to the stock exchanges. The latent risk of the breakdown of negotiations turned into a dominant one in the wake of a new tweet from President Trump at the beginning of May. Both sides have threatened the introduction of new tariffs or the increase of existing ones.

Dynamic structuring of YOU INVEST portfolios has paid off in 2019

Supported by the USA, almost all regions and sectors have been positive in 2019: technology shares have been at the top yet again. The dynamic structuring of YOU INVEST portfolios has paid off in 2019. All funds have delivered a positive performance in the year to date, having recorded set-backs in 2018. At the beginning of May, we slightly stepped up the portion of shares and global emerging markets bonds at the expense of bonds from Eastern Europe and money market instruments.

Disclaimer:

Forecasts are no reliable indicator for future developments.

https://en.youinvest.at/home/legal-note.html

Warning notices in accordance with the Austrian Investment Fund Act:

The funds of the YOU INVEST range may invest significant parts of their assets under management in the shares of investment funds (UCITs, UCIs) as laid down in sect. 71 of the Austrian Investment Fund Act of 2011.

Since this is a blog, we do not update the data and facts of the respective entries. They are in line with our knowledge at the time of going to press. For the current data and facts in connection with funds, please refer to the information in the section “Reporting”.

Frequentis was the second Austrian company this year to make its initial public offering (IPO) on the Vienna Stock Exchange last week. The number of IPOs by international companies for this year has been on the smaller side, with biotech company Marinomed’s IPO at the start of February being the first one in European for 2019.

According to a survey by consulting firm EY, the worldwide Q1 issue volume lay nearly 75 per cent below the figure for the same period of the previous year. One reason for this, aside from a certain aversion to risk, is that IPOs also failed due to uncommon factors: the longest government shutdown in the USA’s history, for instance, delayed the approval of IPOs.

IPOs picking up speed in Q2

However, the general conditions for IPOs improved as the first quarter progressed. Recently, big names also launched their offerings at the stock markets, raising the expectations for further IPOs.

Prominent jeans manufacturer Levi’s managed to make a spectacular comeback on Wall Street in March: on the first day of trading, the long-established company’s share prices rose by almost a third after Levi’s had been absent from the trading floor for 34 years. The US urban mobility service Lyft also caused a sensation, launching its offering at the end of March with a valuation of USD24bn on New York’s Nasdaq technology exchange. This was followed in May by the much-anticipated launch of industry leader Uber on the stock exchange, which reached a total valuation of USD73bn.

In Europe, the largest IPO to date took place in Milan, where payment processor Nexi launched its offering mid-April with a valuation of 7.3 billion euros. In Switzerland, Novartis’ medical technology subsidiary Alcon’s stock market launch caused a major stir with almost EUR25bn of market capitalization. However, its shares were not publicly offered but were issued exclusively to Novartis shareholders.

Various new listings down the road

In Germany, prominent new entrants in individual stocks are on the horizon. The Volkswagen Group is now planning to list the Traton truck division on the stock exchange this year after all. With the approval of the supervisory board, the board of directors decided to aim for an IPO before the 2019 summer break, subject to further capital market developments, the company announced after a supervisory board meeting in the previous week.

Similarly, the Thysenkrupp steelworks and technology company is planning a partial IPO of its lucrative elevator division after a strategic realignment.

Meanwhile, the Vienna Stock Exchange’s new midmarket segment has aroused the interest of oekostrom AG. The Austrian company intends to set the course for another IPO in Vienna at its annual general meeting in June.

Legal note:
Prognoses are no reliable indicator for future performance.

In the US stock markets, earnings season reached its peak in the previous week. A number of major players have already published their results for Q1. In the run-up, disappointing quarterly results with profit declines had been feared; however, most of these proved to be unfounded, and, in fact, numerous companies even exceeded analysts’ expectations. In New York, the S&P 500 and the Nasdaq Composite responded with new highs both during the day and at close.

Pleasant surprises in various industries

By the middle of the week, 129 companies had already presented their results. According to news agency Reuters quoting data from financial data provider Refinitiv, more than 75 per cent exceeded expectations, including, among others, the operators of the social networks Twitter and Facebook as well as toy group Hasbro. Technology corporation United Technologies and arms manufacturer Lockheed Martin also pleased investors with positive figures and have already raised their profit expectations for the whole year. Established IT company Microsoft attracted attention in particular with its figures for the first quarter of the year: owing to its flourishing cloud service business, Microsoft increased its revenue in the first three months of 2019 by 14 per cent to USD30.57bn, with profit increasing by 19 per cent to around USD8.8bn. In this manner, positive surprises in the quarterly figures were found across various industries and sectors.

Good reasons for disappointing figures

Analysts noted that, considering the positive environment the current results create, disappointing figures would weigh more heavily. However, specific reasons rather than general economic concern caused some companies to fall short of expectations – Boeing being one of those. For the time being, the aircraft manufacturer retracted all forecasts for the year as a whole, mainly because of the uncertainty caused by the launch bans on its 737-Max models following two crashes. Construction machinery giant Caterpillar was unable to present convincing revenue figures, in this case, the company reported, because of weak sales in Asia and the Pacific. However, the construction machinery group may be able to look forward to positive developments in the trade dispute and a subsequent pick-up of sales.

Expectations for stock market before possible trading agreement

Since the markets’ heavy index losses in the final quarter of the previous year, negotiations between the USA and China have made significant progress. For many investors, an agreement in the trade conflict seems only a matter of time and is regarded as the next important milestone for the stock markets. Furthermore, the Federal Reserve’s restraint in the current year has had a positive effect on the stock market, and, finally, analysts’ profit expectations have improved significantly since the beginning of April and as earnings season gained momentum.

Legal note:
Prognoses are no reliable indicator for future performance.

After the brilliant recovery of the global stock markets in January with a positive performance of over 7 percent, the positive trend continued in February, albeit at a slower pace. On average, about 3 per cent was earned on the stock markets. The continued defensive stance of bond investors remains interesting. The yield on 10-year German government bonds has reached a level of only 0.04 percent following the ECB's announced support measures (source: Thomson Reuters Datastream, 21.03.2019).

Flat yield curve in the USA

The steepness of the yield curve, which is the difference in yields between 2-year and 10-year bonds, has also received a great deal of attention and has moved very little in the USA, for example. The yield curve remains rather flat, indicating a rather moderate economic development with low inflation. Fears of central bank interest rate hikes have completely disappeared. In the USA, market participants would not even be surprised to see interest rates cut in the second half of the year.

Equity allocation in YOU INVEST funds reduced slightly

Against this background, we have decided to reduce the equity quota in the YOU INVEST funds to about 70 percent (from 80 percent) of the maximum possible quotas. In the bond segment, the proportion of European corporate bonds in the lower high-yield rating segment was reduced. We are therefore still overweight in equities and especially in emerging market bonds, but not as strongly as in recent months.

Disclaimer:

Forecasts are no reliable indicator for future developments.

https://en.youinvest.at/home/legal-note.html

Warning notices in accordance with the Austrian Investment Fund Act:

The funds of the YOU INVEST range may invest significant parts of their assets under management in the shares of investment funds (UCITs, UCIs) as laid down in sect. 71 of the Austrian Investment Fund Act of 2011.

Since this is a blog, we do not update the data and facts of the respective entries. They are in line with our knowledge at the time of going to press. For the current data and facts in connection with funds, please refer to the information in the section “Reporting”.