According to DWS portfolio manager Thomas Hofer, while the credit spreads of high-quality European corporate investment-grade bonds relative to government bonds are at historically low levels, DWS remains very optimistic about their outlook. Current market demand remains robust, with no factors seen that are sufficient to alter this dynamic. Despite record-high issuance volumes in recent years, new bonds continue to be in high demand, naturally exerting a positive influence on prices. There are no current signs indicating a sharp near-term increase in risks for issuing companies.

Hofer analyzes that, by historical standards, traditional credit metrics such as overall leverage ratios and interest coverage for investment-grade bonds remain solid. There is presently no indication that fundamental trends are on the verge of reversing. This situation is particularly evident in the banking sector, which constitutes the largest segment of the euro investment-grade market. In past market cycles, weakness in the financial sector often triggered a widening of credit spreads, subsequently leading to price declines (as bond yields move inversely to prices). However, European banks now benefit from exceptionally strong capital positions, ample liquidity reserves, robust profitability, and very high-quality loan portfolios.

The technology sector's issuing companies represent another area Hofer favors. Specifically, as AI applications drive data center expansion, the market is entering an unprecedented investment cycle. To manage substantial capital expenditure plans, hyperscale cloud providers such as Alphabet, Amazon, Meta, and Microsoft are increasingly reliant on external financing. These issuers are utilizing the euro investment-grade market more frequently and have completed several large-scale transactions.

Hofer concludes that over the next 12 months, the already low credit spreads could potentially narrow further, approaching levels seen before the global financial crisis. Given the very robust fundamentals of this bond market segment, an attractive total return of around 3.5% is anticipated over the next 12 months.

Contrasting Market Views on Rates and Currencies

Contrary to some market expectations, DWS does not foresee further interest rate hikes. US Treasuries (10-year) still present an attractive investment opportunity. Geopolitical uncertainties continue to pose risks for emerging market bonds; however, attractive yield opportunities offer corresponding risk-adjusted returns for investors.

In the near term, the upside potential for the euro against the US dollar is seen as limited. Stronger US economic momentum continues to support the dollar. Initial market hopes for rapid interest rate cuts from the new Federal Reserve Chair have now diminished.

Outlook for Precious Metals

Gold prices have undergone a long-awaited correction, declining by approximately 5% year-to-date (as of July 8th). DWS has turned more cautious on gold's short-term trajectory, expecting prices to consolidate around current levels for the time being, while maintaining potential for medium- to long-term appreciation.