Picture for category MarketScope: Greater swings in markets, moving to the middle in asset allocation

MarketScope: Greater swings in markets, moving to the middle in asset allocation

Author: NN Investment Partners

The outlook for equities is a bit more mixed than earlier this year. We reduced the equity exposure in our tactical asset allocation to slightly overweight. We see continuous upside for the Eurozone and Japan but we feel less comfortable with the US market.

Greece is adding downside risk to the equation. We are not too concerned about the long-term outlook, even if Greece were to default on its debt, as policy tools and political willingness to contain contagion in the Eurozone are much stronger than in previous years. However, we do think that markets have been a bit complacent about the near-term risks surrounding a deal in the run-up to the payments that Greece has to make to the IMF at the end of June.

Markets have become more turbulent in the past few months. One reason is concerns about global growth, due to disappointing data from the US and emerging markets. Yet, as expected, we saw an encouraging pick-up in May retail sales and labour market data in the US. Furthermore, time is running out for Greece as it has to pay off the IMF in June and a deal with its creditors still seems far away. We feel that markets are still a bit complacent about the near-term risks. Then of course we had the sell-off in German Bunds, which underwent a second stage in June. Position unwinding after the long rally since early 2014 was a major cause, but in June fundamental factors also seem at play as inflation expectations for the Eurozone have increased a bit. We do however not expect a big rise in Eurozone bond yields as low inflation and the ECB’s QE program will be around for some time to come.  
At this point in time, we think the prudent way to manage the near-term risks related to the growth outlook and Greece justifies some moderation in our risk-taking, but not a change in our overall risk-tilt. Behavioural dynamics do not give reason for additional concern. We have moderated the size of our overweight in equities - from medium to small – and reduced the underweight in government bonds from medium to small. Finally, we downgraded real estate to neutral.


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