With a record first half in the bag, Erste Asset Management focuses on more defensive income generators

• Scenario: soft landing with risks attached
• Interest rate cuts in Europe and in the USA imminent
• Record volume of EUR 82.2bn in assets under management and EUR 1.46 million fund savings plans
• Erste AM favours more defensive risky assets and corporate bond funds
• Please note: Investments in securities entail risks in addition to the opportunities

The mood on the financial markets was buoyant in the first half of the year. Erste Asset Management, the largest domestic asset manager, also benefited from this situation, setting a new record for assets under management. The most recent share price turbulences, originating in Japan, indicate that the path could now become bumpier. That being said, the investment experts at Erste AM expect the economy in the developed economies to make a soft landing. The asset manager favours defensive equities and higher-yielding corporate bond funds in the second half of the year .

“The recent losses on the stock markets have shown that the path for a so-called soft landing of the economy is a tight one,” summarises Erste AM chief economist Gerhard Winzer. “In fact, growth indicators have recently been somewhat disappointing. However, the trigger for the losses is situated in Japan.”

Interest rate hikes in Japan create shock waves

At the end of July, the Japanese central bank raised its key-lending rate for the second time this year (from 0.1% to 0.25%) at a surprisingly early stage. At the same time, it announced a gradual reduction in bond purchases (quantitative tightening; QT). Even more important was probably Governor Ueda’s statement that more interest rate hikes towards a neutral level would follow if the economic data developed as expected. We could see in increase in the key-lending rate to 0.75% by the end of 2025. At the same time, falling inflation and the weakening labour market in the US have raised expectations for rate cuts: According to Erste AM's expectations, the key-lending rate should be lowered from the current 5.5% to 3.0% by the end of 2025. Similarly, in the Eurozone: “Here, we expect a reduction in the key-lending rate (i.e. deposit rate) from the current 3.75% to 2%,” as Winzer points out.

Stronger yen puts pressure on leveraged investments

The surprising interest rate hike signals from the Japanese central bank have sent shockwaves through the financial system. According to Erste AM economist Winzer, the Japanese currency is massively undervalued. In recent years, the driving factor behind this has been the ultra-loose monetary policy in Japan, while the other central banks have raised key-lending rates. The yen has increasingly been used as a financing currency for investments in higher-yielding forms of investment. This can be seen in the sharp rise in the volume of yen-denominated loans from Japanese banks to foreign countries. “The interest rate differential between Japan and the rest of the world is now narrowing. The result is a significant appreciation of the yen. This is putting pressure on debt-financed investments,” emphasises Winzer. In this context, shares with high valuations and equally high profit expectations have also come under pressure (e.g. US technology companies). For Winzer, this development comes with a positive aspect: “The more the market turbulence is driven by the unwinding of yen carry trades or the less by a deterioration in the economic environment, the sooner the markets could calm down.”

Base-case scenario: soft landing

The key points for the soft-landing scenario as deemed most likely by Winzer are a slowdown in economic growth in the developed economies to slightly below trend, and a slow decline in inflation. Next year, inflation rates will probably still be slightly above the central banks’ target of 2% (USA: 2.3%, Eurozone: 2.2%). “The USA is no longer the growth engine in this environment.” While the US economy is slowing to below potential growth (2025: 1.7%), Europe is reembarking on its growth path (Eurozone: 1.0%). A similar scenario applies to the manufacturing sector, where economist Winzer sees a transition from stagnation to a growth path, whereas the service sector, which has been the growth driver to date, is gradually weakening. However, the latest economic indicators have not supported this scenario. The downside risks have increased.

Second half: focus on defensive equities and corporate bonds with higher yields

Based on its macroeconomic assessment, Erste AM is currently adopting a more defensive equity allocation: in the mixed funds managed by Erste AM, the equity weighting is currently slightly below the long-term weighting, whereby shares with low volatility such as telecommunications and insurance companies, healthcare, and consumer staples are overweighted. In the country allocation, Latin America is overweighted on the equity side, while the USA is underweighted in response to the increased recession risks and ambitious equity valuations. Erste AM is taking a neutral stance vis-à-vis the other regions (Europe and the UK, Asia and the other emerging markets).

Bonds will be given greater weight in the second half of the year, resulting in an increased bond ratio. High-yield bonds in particular offer an attractive risk/reward ratio due to the widening of the interest rate spread relative to risk-free investments. Bond funds with a short residual time to maturity (and money market funds) are also relatively attractive for Erste AM due to the inverse interest rates. Bonds with high credit ratings, especially government bonds, remain underweighted, as the expected cuts in key-lending rates have already been priced in.

In potentially more volatile market phases, a certain allocation in gold is a must. In the long term in particular, it could prove to be a safe haven against market turbulence, excessive inflation, and a depreciating US dollar. In the case of industrial metals and energy stocks the pro arguments of the base case scenario of the "soft landing" and the the threat of war in the Middle East balance out with the contra arguments of the weak manufacturing sector and the outlined growth risks. Erste AM is therefore neutrally positioned here. „This positioning offers us a buffer for one or two turbulent phases in autumn and at the same time the opportunity to be involved in a recovery right from the start,” says Heinz Bednar, CEO Erste Asset Management.

Note: Prognoses are not a reliable indicator of future performance.

This results in the following areas of focus for the funds of Erste AM for the second half of the year: in the equity line of funds, we have CORE Equities (ISIN: AT0000A2GK86), an index-tracking equity fund with a lean cost structure that is suitable as a basic investment. In the bond fund segment, Erste AM is launching ERSTE BOND CORPORATE BB (ISIN: AT0000A09HC7), a corporate bond fund on the threshold from investment grade to high yield. The focus is also on the newly launched ERSTE OPPORTUNITIES MIX (ISIN: AT0000A3BMJ8), a globally investing mixed fund that invests in long-term trends while also seizing short and medium-term opportunities.

Please note: Investments in securities entail risks in addition to the opportunities described.

Erste AM: record level of assets under management at EUR 82.2bn in the first half

Despite many question marks regarding interest rate cuts and economic developments, investors were confident in the first half of 2024 and stepped up their investments in funds. Erste Asset Management has increased its assets under management by 5.1% or about EUR 4bn in the year to date to a new record of EUR 82.2bn (as of 30 June 2024; source: own data). The companies in Croatia, where the volume soared by 45.4% from a comparatively low level, and in Romania, where it rose by 15.3%, recorded strong growth. The company with the highest volume of assets under management behind Erste AM in Austria (EUR 54.3bn) is the Czech subsidiary with an investment volume of EUR 17.6bn. Erste AM is the market leader in Austria, Romania, and the Czech Republic. Mixed funds are the most important asset class at Erste AM, accounting for around 40% of total assets, followed by bonds at about 30%, equities at about 23%, and real estate at about 6%.

Heinz Bednar, Managing Director of Erste AM, takes stock:

“The mood on the markets was very positive in the first half of the year, and our customers were rewarded for their investment with above-average fund value growth. From here on out, it won't be quite as easy, because we can see potholes opening up that we want to avoid with suitable strategies and products.”

A quarter of Erste AM’s assets under management held in funds are sustainable

Ethical, social, and sustainable criteria are becoming increasingly important for both retail and institutional investors as well as special funds. The volume of sustainable funds classified under Articles 8 and 9 of the EU Disclosure Regulation has increased by EUR 5.2bn to EUR 22.6bn in the year to date, which corresponds to almost 30%. The share of sustainable investments in Erste AM's total assets under management was 27.5% at mid-year.

Equity and bond term funds in demand

As the sales figures show, global equity funds such as the sustainable ERSTE RESPONSIBLE STOCK GLOBAL (ISIN: AT0000646799) and ERSTE STOCK QUALITY (ISIN: AT0000A2HV58) were in demand among Austrian investors in the first half of the year, as were bond term funds for interest rate bargain hunters. Erste AM manages a volume of EUR 252.6mn with this series of term funds; nine have been launched to date. “The current bond yields, especially for higher-yielding corporate bonds, open up good earnings opportunities. We will continue this successful series in autumn”, as Bednar announces further launches of term funds. In Croatia, a money market fund is very popular with investors. In Slovakia, the Czech Republic, and Hungary, bond funds lead the ranking of the most popular funds in the first half of the year. In Romania, a mixed fund ranks at the top of the popularity scale.

Please note: Investments in securities entail risks in addition to the opportunities described.

1.46 million fund savings plans so far

Fund savings plans are proving to be a popular investment option, especially for investment newcomers, and are widely available at Erste AM. They had increased to a record number of 1.46 million units by the end of the first half of the year. This represents a growth rate of about one fifth over the year. In relation to the total portfolio, more women (51.6%) than men (48.4%) regularly invest in Erste AM funds via savings plans. Around 13% of fund savings plan holders are under 30, in Austria even more than a fifth. More and more people are taking advantage of the option to open such a fund savings plan online via George: one fifth of newly opened fund savings plans are already recorded digitally (without advice). Croatia (82%) and Romania (60%) have a particularly high digital check-out rate. In Austria, equity funds are highly popular as fund savings plans (75%), while bond funds dominate in Romania. In the Czech Republic, equity funds, bond funds, and mixed funds each account for a third of fund savings plans.

About us

Erste Asset Management GmbH (Erste AM) is an international asset management company with a strong position in Central and Eastern Europe. Erste Asset Management is backed by the financial strength of Erste Group Bank AG (Erste Group). At its locations in Austria, Germany, Croatia, Romania, Slovakia, the Czech Republic, and Hungary, Erste AM manages assets of EUR 82.88bn (August 2024). Erste Asset Management has been operating successfully in the market since 1965.

Risk notes

Legal notice: Forecasts are not a reliable indicator of future performance. Please note that an investment in securities also involves risks in addition to the opportunities described.

CORE Equities

ERSTE BOND CORPORATE BB

ERSTE OPPORTUNITIES MIX

ERSTE RESPONSIBLE STOCK GLOBAL

ERSTE STOCK QUALITY