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- [00:02]
A
Good morning everyone, and welcome to Julius Baer's Moving Markets Podcast. It is Wednesday 3rd June, and my name is Lucia Ciaculovic. I am delighted to be your host today. There is plenty happening in the markets right now and we have a lot to talk about today. First up, I'll catch up with my colleague Jan Bob to run through the latest market moves. Then we're joined by Afonso Borges for an update on the UK bond market. And finally, I'm looking forward to speaking with Nena Dinic about how emerging emerging market equities have been holding up lately. But first, Jan, good morning. Great to have you with us.
- [00:41]
B
Good morning, Lucia. Thanks for having me.
- [00:43]
A
So, let's start in Europe, where the latest inflation figures seem to have clarified the outlook for the European Central Bank. We've seen headline inflation edge higher and some components moving quite sharply. What stood out to you in yesterday's data release, especially with regards to ECB's meeting next week?
- [01:03]
B
Look, the key takeaways that inflation is proving a bit more stubborn than hoped. Headline inflation ticked up to 3.2% in May. That was significantly driven by double digit energy price growth. But core inflation also ticked higher, reaching 2.5%. That's the highest level since April last year. But what really caught attention was services inflation, jumping sharply from 3 to 3.5%.
- [01:31]
A
So does that essentially seal the deal for the ECB?
- [01:35]
B
Well, look, it certainly strengthens the case. Markets are already pricing in 25 basis point rate hike next week. So in a way, investors are not surprised by the data.
- [01:47]
A
Yeah, and equity markets in Europe seemed quite relaxed about it too. The Euro Stoxx 50 closed 1.2% higher yesterday. In fact, most regions and sectors finished in positive territory. And in the US the S&P 500 advanced for the ninth consecutive day.
- [02:05]
B
It's quite impressive. The S&P 500 gained 0.1%, with the tech sector doing much of the heavy lifting. Yeah, once again, right.
- [02:15]
A
The Philadelphia Semiconductor index surged almost 6% to another record high, highlighting the strength of the AI theme. Although not all tech names had a good day. Alphabet, for example, fell nearly 4% after announcing plans to raise $80 billion from stock sales to fund its AI investments.
- [02:37]
B
Yes, because it raised the question that if a company with such strong cash flow feels the need to raise external capital for AI to raise equity, what does that imply for others?
- [02:52]
A
Right, Jan. But this concern didn't derail the broader market. We've seen strong gains elsewhere. Hewlett Packard, for instance, jumped 20% after issuing an upbeat outlook and raising its full year guidance. But it wasn't the only company that made headlines yesterday. Marvel Technology surged the most in 26 years yesterday. So what's behind that move?
- [03:17]
B
Now, let's say the stocks jumped more than 30% after Nvidia CEO described it as the potential next trillion dollar company. That's a bold statement. At a market cap of 250 billion, it is a long way from $1 trillion. But that's a gap that peers have been covering at a clip. A year ago, Micron and SK Hynix had market values of billions, barely 100 billion. They now top US$1 trillion at the moment. Those strong endorsements by such prominent AI figures can have dramatic impact on valuations.
- [03:56]
A
Yeah, that's really interesting. Now, let's stay with company specific news for one more minute. Jan. UniCredit has been pursuing Commerzbank since September 2024 in an effort to turn the Italian bank into a dominant force in Germany. Now, the Italian bank reached an important milestone, right?
- [04:15]
B
Yes. UniCredit has now secured commitments that push its stake in Commerzbank above 30%. And crossing that threshold is crucial because it significantly strengthens UniCredit's influence over Commerzbank and signals that its takeover bid is gaining real traction with investors. However, it also sets the stage for potential clash with Commerzbank's management and the German government.
- [04:45]
A
All right, and now turning to currencies, I see the yen is under renewed pressure, hovering near its weakest level against the dollar since late April.
- [04:54]
B
Yes, markets are watching the 160 level against the dollar very closely. The pair touched the critical level in early trading, the first time since April 30th and wiping out all gains made after a record amount of intervention by Japan. However, for now, the level seems to hold, but you can feel the tension when you look at the screen. Japanese equity markets are way more relaxed. The Nikkei is raising ahead this morning, up 3%, reaching its longest run of daily gains since 1995.
- [05:33]
A
All right, Jan. And finally before we wrap up, let's look ahead. It's a fairly busy day on the macro and corporate front. What should investors be watching?
- [05:43]
B
Yeah, let's make it quick. There's quite a full agenda in the U.S. we have the ADP employment report, ISM services data and factory orders, all important for gauging the strength of the economy in Europe. Producer price data will give another read on pipeline inflation pressures. And on the corporate side, earnings from Companies like Broadcom, CrowdStrike and Inditex will keep the focus firmly on tech and consumer trends. So plenty of moving pieces and potentially a few catalysts to test this still resilient market sentiment.
- [06:16]
A
Great. Very interesting. Thank you very much, Jan, for this nice overview.
- [06:20]
B
Well, thanks for having me on the show, Lucia.
- [06:26]
A
And now let's turn to the world of fixed income. Good morning, Afonso.
- [06:31]
C
Good morning, Luxia. How are you?
- [06:33]
A
Good, thanks. So you've recently published a research note making the investment case for UK gilts. Can you walk us through your rationale?
- [06:43]
C
Sure. So I think to start, when we look at the UK gilt market and the UK rates market more broadly, considering policy expectations for the bank of England, those have repriced the most out of any DM since the war in Iran started at the end of February, beginning of March. So given our baseline that eventually, over the course of the third quarter, the event will tend towards a resolution, we think there's the most room for the UK gilt market to benefit from this resolution or at least move towards a resolution. Then when we consider other factors in the UK economy, when we look, for example, at the change in the unemployment rate, it had risen the most prior to the war out of any dm, which we think puts the UK economy on a weaker footing, which means that even if the war in Iran goes on for longer and the bank of England is eventually forced to hike, given inflationary pressures, we think that the weaker economic standpoint will eventually force the bank of England to not be able to hold rates in restrictive territory for as long as the market is pricing. So when we put those pieces together, either you get a resolution or you don't. But it seems very unlikely that the bank of England will be able to stay as hawkish as the market is pricing in. And then when we take a step away from the developments in Iran and we think about the more fiscal and issuance backdrop in uk, we think here there's a bit of a misconception in the market, perhaps on the back of the least trust period in 2022, when the UK fiscal picture was a bit worse, and when we actually look at the official IMF forecast for changes in debt to GDP in the uk, and when we consider the path for debt issuance in Ukraine, they seem to us to be quite a bit more supportive than other DMs. So eventually, when there's a resolution to the war, we think this will be an additional catalyst to expect lower UK gilt further out the curve.
- [08:52]
A
All right. And I understand that gilts have done well in the weeks since you published the report. So does it still make sense to add them to the portfolio at current levels?
- [09:02]
C
The short answer is yes. So yield 70. Done. Well, since we put out this report, they're anything between 20 to 30 basis points richer both outright and relative to Treasuries since three weeks ago when we published this. But I think it still makes sense because even despite this rally, when you again consider how much is priced in for the bank of England, it's still the most hawkish repricing out of any dm. So still the most room to go in terms of moves in yields from here. Then when you consider the growth momentum in uk, part of the reason why gilts have been outperforming in recent weeks is that data has come in weaker than expected, which validates part of our thesis that the bank of England will not be able to hold rates in restrictive territory for too long. When I think about all of that, I think it still makes sense to add and I wouldn't hesitate despite the recent rally.
- [10:03]
A
Great. Thanks a lot for being with us this morning, Afonso, and for sharing your insights.
- [10:08]
C
Thank you.
- [10:13]
A
Now, last but not least, let's delve deeper into emerging market equities. Good morning, Lenat.
- [10:19]
D
Good morning, Lucia.
- [10:21]
A
So we've seen a stellar performance in emerging market equities. The MSCI emerging markets index is up nearly 30% since January. Can can you unpack what's driving this performance?
- [10:33]
D
Yes. So a big part of the outperformance in the emerging market is actually driven by Asia. So we have seen exceptional earnings upgrades from the semiconductor heavyweights in Korea and Taiwan, which are essential for the global AI infrastructure buildout, and they have seen substantial market gains. So Taiwan's benchmark index is up 60% year to date and Korea is up more than 120% in dollar terms. And what's important, these two economies alone now represent nearly half of the entire global emerging market index, compared to around 25% just a year ago. So in other words, this combination of an improved earnings outlook in the Asian tech space and their increased weight index has basically become a very powerful engine to drive overall returns for the asset class.
- [11:30]
A
Okay, and with such a significant portion of emerging market performance tied to the Asian tech sector, does this create a concentration risk? Are you becoming concerned about putting too many eggs in one basket?
- [11:44]
D
Yes, that's a good point. So we certainly monitor this increasing concentration risk closely. However, the prevailing view is that we don't suggest to shy away from emerging markets because of this. So the main argument is actually that even if you exclude the AI linked hardware and semiconductor stocks, the projected earnings growth for emerging markets still remains quite solid. So around 25% for 2026 and also 14% for 2027, which is basically significantly higher than in developed markets. So we believe there is a broad underlying earnings strength in emerging markets beyond just the AI linked heavyweights. In our view, there is basically not a right response to a higher tech concentration, but in our view we believe we lean towards not fighting the trend, but rather to recognize that the asset class now offers both a structural semiconductor leadership story with Taiwan and Korea, but also a wider earnings cycle in other markets beyond AI, which still remains constructive for the near term.
- [12:58]
A
Okay, so you said it's not solely reliant on the tech boom. What other factors are supporting this positive outlook for emerging markets?
- [13:06]
D
Exactly. So beyond the impressive tech narrative, we also have other bottom up and top down elements that contribute to a rather constructive environment for EM risk assets. So we see improving profitability on the corporate side as a key factor. We also see a recovery in domestic demand in many emerging economies. And also our outlook of a softening US dollar remains supportive. And last but not least, we also believe that the macro environment still remains relatively stable despite the global energy shock from the Iran war. So ultimately we we don't really deviate from our key message that we already sent out in the beginning of the year, which is basically that we remain at a bullish stance for emerging markets. And despite this increased concentration in the tech sector, the view remains justified at this stage.
- [14:05]
B
Great.
- [14:05]
A
Thank you Nenat for this interesting update.
- [14:08]
D
Thank you Chair for the invitation.
- [14:14]
A
Now, before we wrap up today's show, I'd like to turn your attention to tomorrow's episode where we will have our group CIO Yves Bonso joining us and he will talk about his thoughts on some of the latest action in markets. All right, that's it for today then. Thanks again to my guests and thank you all for tuning in. Have a great day everyone and bye for.
- [14:43]
E
The information and opinions expressed in this podcast constitute marketing material and are not the result of independent financial or investment research. Please refer to www.juliusbear.com legal podcasts for further other important legal.