Author: NN Investment Partners
The outlook for risky assets remains favourable. A modest but sustainable economic recovery and easy monetary policies continue to serve global markets well. Temporary shifts in investor sentiment and positioning can occasionally lead to exuberance in some specific areas and to some near-term correction risks. They are however no reason to move to a defensive allocation stance. We overweight real estate and global equities while we underweight (German) government bonds.
Financial markets extended their rally in recent weeks. The European Central Bank (ECB)’s purchases of government bonds pushed the yields of German Bunds to record lows. At the end of March, no fewer than eight European countries were offering bonds with negative yields for maturities of up to five years. This situation is taking financial markets into unknown territory, giving a fresh impetus to the search for yields. This means investors are being driven to take more risks by purchasing bonds with either a longer term or with a greater degree of credit risk. Alternatively, a growing number of investors have turned to equities and listed real estate markets to capture a decent yield.
Statements by Federal Reserve Chair Janet Yellen, according to whom the US central bank was in no hurry raise interest rates, also boosted investors’ appetite for risk.
We have a large overweight stance on listed real estate and a medium one on equities. We also adopted an overweight position on high-yield (HY) bonds and on emerging market (EM) government bonds issued in hard currencies. Inversely, we have a large underweight on German government bonds.