Author: NN Investment Partners
The main certainty at the moment is that uncertainty rules again. This is reflected in the combination of sideways movements in bonds and risky assets with the persistence of high volatility, but also underscored in the risk-averse behaviour and the sharp fall in confidence among the active players in the market.
Markets look fragile at the moment. Not only has volatility increased in many parts of the market, but also the lack in coherence in market dynamics is a noteworthy feature. Ongoing uncertainty about emerging markets (EM) has spilled over into developed market (DM) assets, causing a sharp rise in DM equity market volatility. Volatility rose much more compared to other periods of uncertainty in past years. Currently, volatility is still elevated, but has come down from peak levels. The fundamental trends in EM and commodity space justify caution and carry contagion risk for the developed economies. Besides growth momentum, also market performance between DM and EM has diverged a lot this year and at some point renewed convergence seems likely to come. However, there are many ways in which this conversion can evolve. Simply put, contagion of EM weakness can drag DM down or DM resilience can provide an anchor for EM and help it to stabilise. At this point in time it is very difficult to have a strong conviction on this future convergence between EM and DM. Feedback loops from EM to DM, from markets to the real economy, and from policy makers to markets can very easily tilt the path of the global economy toward either one of those outcomes. This all makes the market outlook highly uncertain. With limited visibility on the direction of markets, we prefer to take a cautious stance, with neutral allocations to government bonds and real estate and underweight positions in equities, fixed income spread products and commodities.