Reasons remain to be overweight risk assets, says ING IM’s van Nieuwenhuijzen
Valentijn van Nieuwenhuijzen, head of Multi Asset at ING Investment Management, suggests that while it is correct to try to spot risks that could strike over the summer, facts on the ground still point to taking an overweight position on risk assets.
The summer has come, the boys have played footbal in Brazil, the men are still cycling in France and the markets are calm. It coundn’t be a better time to go on holiday, go to the beach and relax. Or could it? Despite the low level of volatility in markets and a remarkable stability in macro and investor behaviour, many investors are actually concerned about exactly that: the suspicious degree of stability in the system. Everybody seems to wonder what the catch is.
The fact that current macro or market stability can contribute itself to future instability (basically by creating over-confidence and excessive risk taking) is an obvious reason to have this concern, but at the same time it is clear that these periods of stability can last for months, if not years. Mostly (not always, think 1987!), shifts from a low-volatility to a high-volatility regime need a trigger to materialise and these triggers do not seem that obvious to identify during this Summer. There are always things that could go wrong or unexpected shocks that could materialise, nothing is more certain than that, but compared to the “hot” Summers of credit crises, commodity spikes, Euro crises and fiscal cliffs in recent years, the outlook for the summer of 2014 looks relatively benign.
Even so, some triggers can be imagened if one’s mind is set to it. The first one might be the summer drought in market liquidity. More than ever low market volatility is accompanied by low trading and liquidity levels in almost all parts of global markets (not only credit space, but also rates, FX and equity markets). This could indicate that an even smaller trigger or shift in investor behaviour could translate into a significant market correction as a more limited amount of investors can already have an impact on market pricing in such an environment.
Next to this uncertainty over the outlook for monetary policy in especially the US and the UK might trigger more risk-averse investor behaviour. Not so much in our opinion, because a substantial shift in actual policy setting is already in the offiing for the second half of the year, but more because to topic has been and still is the singly most influencial factor for global investor sentiment.
Also, the usual suspects of an oil/commodity shock (Iraq/Ukraine turmoil, El Nino) or persistent developed market growth disappointments and intensifying deflation fears in Europe might become more dominant again. Given the recent history of digestion by markets of geopolitical tension and the recently further enhanced commitment of the European Central Bank (ECB) to fight of deflation these risks seems containable, but close monitoring is certainly needed.
And finally the largest “Grey Swan” of them all, a systemic crisis in China cannot be ignored. A sharp correction in real estate prices and constrcution activity against a backdrop of fading growth momemtum and a rising book of non-performing loans on bank balance sheets create little doubt on the seriousness of this potential risk factor, but whether it will prove to be this or next years problem remains impossble to tell. More importantly, whether it will prove to be a systemic crisis with regional implications or one with a large global fall-out is another impossbility to know in advance.
As always, therefore, there are risks around our summer outlook, but not troublesome enough (yet) to adapt our near-term risk-on allocation stance. We remain overweight a broad spectrum of riksy assets, with equities a our clear favorite.