Author: NN Investment Partners
Downside risks have abated in recent weeks
We remain in an uncertain environment where policymaking remains a key driver for risky assets. This is not the most comfortable position to be in, as event risk is high and secondguessing the next policy step may create unnecessary volatility. For risky assets to perform strongly over a prolonged period of time, we need to see central bank measures gaining traction in the real economy, in the form of higher growth and inflation numbers.
The impact of central bank decisions on financial markets cannot be underestimated. In March, developed market (DM) central banks displayed a bigger-than-expected willingness to respond to downside risks. This should be reflected in lower risk premiums for most asset classes. The positive momentum for risky assets has however faded in the last weeks as the impact of short-covering from oversold technical levels petered out and many uncertainties remained. We believe that, at some point, fundamental factors will drive financial markets again. Once that happens, investors are likely to note that downside risks to the global economy have abated recently, partly an outcome of the better than expected economic data and the central banks’ pre-emptive response to downside risks. At the same time, we acknowledge that the easy monetary policy stance has driven the safest government bond yields back to their lows for the year.
Since we assess the fundamental backdrop to be better than earlier in the year, we believe that the divergence in the direction of data surprises (up) and yields (down) has led to excessive valuations in global government bond markets.