Author: NN Investment Partners
The turmoil that dominated markets in the first weeks of 2016 reverted to a strong rebound in risky assets last month. The combination of extreme pessimism and a lower risk perception resulted in a sharp turnaround in equities, real estate and commodities. Going forward, we believe that modest but persistent growth and high risk premia will continue to create appetite for higher-yielding assets.
Markets have calmed down somewhat in recent weeks. Investors seem to realise that growth has become more modest than in the past. What has also become clear is that the likelihood of a contraction in global activity this year is much smaller than market pricing implied during most of the first two months of the year. The global economy is still crawling upwards, despite frequent “mini cycles” driven by factors such as central bank policy, politics and sentiment among consumers, businesses and investors.
The recent bounce in risky assets followed a turnaround in oil prices, better-than-expected US macro data and diminished fears of a hard landing in China, given recent policy measures. The risk premium on equities, meanwhile, is above its 10-year average. Sentiment indicators such as the put/call ratio and bull-minus-bear index have recovered from depressed levels, and the European Central Bank (ECB)’s latest venture further into non-conventional policies is pushing investors up the risk curve.
A “search for yield” theme will continue to emerge once temporary fear factors are tamed again. Modest but persistent growth and high risk premia will continue to create appetite for higher-yielding assets, especially with the ongoing liquidity support from central banks which will create ample funding for this yield-seeking game. With another strong vote of commitment to liquidity provision from the ECB, we therefore decided to upgrade asset classes that are likely to benefit from growth resilience and investor hunger for yield: fixed income spread products and global real estate.