Maarten-Jan Bakkum, NN Investment Partners
Rising uncertainty about the global growth trajectory due to the rapid spread of the Delta variant of coronavirus is leading some investors to change their asset allocation views.
“We have changed our long-held positioning in fixed income in our multi-asset model portfolio,” said Maarten-Jan Bakkum, senior emerging market strategist at NNIP.
Notably, the firm recently closed its moderate underweight in US Treasuries and also took some profit on its positions in high yield by reducing its overweights in US and Eurozone high yield credit from large to moderate.
Fundamentally, however, NNIP’s views have not changed much. “We still believe the macroeconomic backdrop and monetary policy outlook should push yields higher, not lower,” explained Bakkum.
Yet this is over a medium-term horizon. In the short term, the fund house believes that the strong momentum in the opposite direction has made it risky to maintain its positioning.
“We therefore temporarily reduced our exposure to the recovery theme mainly for risk management reasons. This does not mean that we believe we are now in a secular stagnation scenario,” added Bakkum.
Mixed views on equities
In equities, meanwhile, NNIP has made no changes to its allocation, remaining neutral overall. More specifically, the firm is overweight in the Eurozone and underweight in emerging markets.
This is against a backdrop of overall recent weakness in global equities more recently.
For example, the rotation out of cyclical and value stocks into defensive and growth companies has accelerated, despite relative earnings momentum and valuations being in favour of the former.
At the same time, when looking at corporate earnings, although only a small proportion of companies have so far reported, earnings seem to be beating expectations. However, strong results have not translated into higher equity prices, implying that such earnings surprises had already been priced in.
“It could also be that investors are starting to discount a serious slowdown in growth by reducing their cyclical exposure,” said Bakkum. “While we believe such a conclusion would be premature, if growth fears were to persist the broad equity markets would eventually suffer.”
As a result, the amount of uncertainty is dampening any interest in taking large directional bets, he added.
A cooling outlook
Compared with the first quarter of the year – which saw strong earnings and macro data, positive virus developments, and easy fiscal and monetary policy – a number of concerns have appeared.
For example, earnings growth, which peaked in the second quarter, is likely to quickly normalise. In addition, inflation continues to come in well-above expectations, the US Federal Reserve has started to prepare for tapering and the Delta variant is spreading rapidly across the world.
“All this does not necessarily mean that economy is heading for a severe slowdown. In our view, these developments are part of a process of normalisation,” added Bakkum.
He also sees some bright spots – levels of growth and stimulus being well above historic norms and successes in vaccination campaigns in the US and Europe.
The overall response from investors has been a cooling in sentiment. “The bull-to-bear and put-to-call ratios have fallen back to neutral territory, while segments of the market that had exhibited clear exuberance, such as special purpose acquisition companies and cryptocurrencies, have fallen significantly in recent months,” explained Bakkum.
Downside risks should be limited, however, as a result of soaring M&A activity, rising numbers of equity buy-backs and the lifting of curbs on banking sector dividend distributions.