Author: NN Investment Partners
Many investors seem to lack conviction about the direction of financial markets currently. This is especially visible in equity markets, which have been moving sideways for a few weeks. This lack of conviction is reflected in investor behaviour as cash levels remain high, investors’ sentiment weak and exposure of mutual fund managers to both bonds and equities is modest. These indicators mainly reflect the fact that the investment community remains stuck in a wait-and-see mode and probably on the lookout for further policy or growth guidance before allocating more of their no-return cash to capital markets.
Despite the clear improvement in risk appetite since February, it seems that many investors prefer to stay on the side-lines for the time being. This wait-and-see attitude can be partly explained by the fact that the relevant news flow has been remarkably mixed in recent months. Economic data and earnings data have carried no clear underlying directional message. Also, valuation metrics for many parts of the market are somewhat mixed as absolute valuation measures (compared to their own history) are either expensive (bonds, US equities) or neutral (non-US equities, fixed income spread products), while relative valuations (compared to cash) are eithercheap (equities, emerging market debt, high yield), neutral (credits, real estate) or expensive (government bonds). Meanwhile, signals from behavioural metrics supporting strong convictions on market direction are also limited.
We also have a modest conviction on near-term market direction with most of our risky assets at neutral stance (equities and real estate). We do have an overweight position in spread products due to the attractive yields offered. These products also benefit from the broadening of economic data surprises, most notably in emerging markets, and the ongoing recovery in oil prices.