NN Investment Partners

Vol-low the leader


(Photo: NN Investment Partners)

Again are we remembered this week that the horror of terror is long but beaten. Our thoughts go out to all persons and families impacted by the drama in Manchester. This era of intolerance and aggression is often hard to digest and equally challenging to understand. This holds for most in society, in politics and in markets. Sadly enough these types of shocks have now also become so regular that markets are less shocked by them than a few years ago.

On the other hand, this stems from the positive fact that markets have learned that these terrible events do not necessarily undermine the social and economic fabric of our societies. This does not take away any of the suffering for those involved, but it does underscore that terror is not winning the fight against the free, democratic and open-minded cultures that operate within a transparent rule of law.

 The value of the latter cannot be emphasized enough. Actually that is something markets also understand very well. The short bout of market volatility of last week might well have been triggered by political newsflow in both the US and Brazil that hinted at an erosion of democratic values and respect to the rule of law. It remains unclear whether there has actually been an obstruction of justice by the US President or if the Brazilian President has been involved in corruption, but just the perception of higher probabilities of these rumours to be proved true in the future created the most volatile market backdrop in months.

 Still it did not dominate markets very long and the underlying trends of the last months quickly took over the lead again. Volatility started to decline again by the end of last week, while US dollar weakness, range trading bond markets and steadily higher grinding equity and spread markets resurfaced. To some extent this is not too surprising as markets have also learned in recent years to look through the political fog for as long as underlying fundamentals remain firm.

 And the macro and earnings backdrop remains very constructive. Global growth is stronger and more synchronized than seen in at least 5 years and corporate earnings are rising at their fasted pace since 2009. Moreover, labour markets and household and business sentiment are at their best levels in more than a decade. Also interesting is that global growth is not only strong, but also steady as the quarterly volatility of GDP growth has reached record lows over the last three years (see graph). This explains partially why the low-vol theme has been so successful in recent years in financial markets.

What is also relevant for markets however is that although economic data have remained strong, they are no longer strongly surprising to the upside. Some regions still are (Europe!), but others are more mixed or even surprising to the downside in recent weeks (the US). After the strong run-up in expectations during the second part of last year and the first quarter of this year, this is actually not that surprising on itself. It does imply however that the active investor base, which is currently largely neutral in sentiment and positioning, observes limited additional triggers to start adding more risk to their portfolios.

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