NN IP: Rose-tinted glasses or sheer ignorance?

The asset class performance painted a mixed picture over the past week. On the one hand, growth assets performed well, driven by good macro data, even if these no longer surprised to the upside. Especially cyclical sectors performed well. On the other hand, there was also the ongoing search for yield, reflected in the further tightening of credit spreads despite valuations being at historically tight levels. The current environment of growth without inflation and a consensus view that central banks will exit in a very gradual way is supporting this asset class. Real estate underperformed equities, partly because of the rise in treasury yields.

For the time being it looks as if strong macro data trump the risk factors, something which was very different a few years ago. Imagine what would have been the market impact of the Catalonian independence movement on Spanish spreads in 2012. Certainly more than the 3bp rise we observe today.

Spain is not the only source of uncertainty. In the Czech Republic, a right-wing candidate won the elections, which may increase the challenge for the European Union to move ahead with common policies on e.g. immigration. Brexit talks are not making a lot of progress, especially with the weakened position of PM May in the UK. Also in the US there is political chatter, both around the nomination of the next Fed Chair and around the progress of tax reform. Today we learned about the ECB and its views on the reduction of the QE program. The central bank will reduce its monthly asset purchases from EUR 60 billion to EUR 30 billion in January 2018 until at least September 2018 or longer if necessary. Also, the ECB reiterated its forward guidance on rates, i.e. that interest rates will remain at their present levels well past “the horizon of the net asset purchases”. 

So far, all these sources of uncertainty have little or no impact on the market. This is not to say investors should ignore them. In our qualitative assessment of the market we take these into account by adopting a slightly more cautious positioning than our signals indicate.

We have made no changes to our allocation this week. We continue to have exposure to growth through equities and to income through spreads. Real estate is our biggest overweight, being a beneficiary of both themes while also supported by its valuation.