NN IP : Recession fears are too high
Dutch asset manager NN Investment Partners assesses financial markets have over-estimated the chances of a global recession.
It said it is difficult to say the likelihood of a recession is any more than 20%.
Valentijn van Nieuwenhuijzen, head of Multi-Asset at NN Investment Partners, commented: “Developed market growth momentum fell back somewhat to around a 1%-annualised pace during the second half of last year, but neither the level of growth nor the degree of the fall-back looked alarming from an historical perspective. It falls easily within the range of movement in the business cycle that can be described as noise rather than clear change of direction.”
He explained equity valuations have come down by up to 20% from the recent highs, implying a rising risk of an earnings recession.
“We doubt this will happen outside the commodity sectors as the consumer sector is supported by low oil, low interest rates and an improving labour market. We also see little earnings risk for the health care sector. In addition, central bank support will help market sentiment. For all these elements we maintain a neutral stance, instead of throwing in the towel and follow the herd over the cliff.
“Nothing guarantees that data surprises will not weaken further but the facts on the ground are certainly not yet aligned with a base-case recession scenario,” van Nieuwenhuijzen added.
According to NN IP, the current levels of risk premia show “the impressive extent” of recent market moves.
The equity risk premium is currently around 5% compared to a long-term average of 3.5%. It has only ever been higher in the last 25 years during the peaks of the credit and Euro crises in 2008 and 2012/13, NN IP underlined.
The firm also stressed that the spreads at which high yield bonds trade over government bonds have only been higher in crisis periods.
Given this environment, NN IP has reduced its underweight in emerging markets from medium to small.
It explained its decisions by a number of factors such as the dovish Fed expectations, a weaker dollar, relative economic data, a very negative positioning and some stability in cyclical commodity prices.
The Eurozone has been cut to neutral.
As for sectors, NN IP said it has shifted further its defensive bias by removing the overweight in IT.