Markets continue to push their way higher, shrugging off occasional swings in investor mood and the resulting spates of volatility. The underlying macro and earnings fundamentals are still improving, and the fear factors that have influenced sentiment in recent months — growth concerns, political risks, oil price volatility and Fed rate-hike worries – have not introduced any persistent negative feedback loops into the real economy.
Asset Class Dynamics in 2015
Source: Thomson Reuters Datastream, ING IM (Jan 2015 – Mar 2015)
Income shifts, labour markets support spending
Global growth momentum looks poised to accelerate. Monetary policies throughout the world remain supportive and conditions in the US economy, the main growth engine, point to increasing demand and spending. Income in the US is shifting from producers to consumers; the former are being hit by a stronger US dollar while the latter are benefitting from lower oil prices. Cheaper oil is transferring income away from oil producers with a high savings propensity towards consumers, whose appetite for saving is much lower. This should increase overall global consumer spending. The brightest spot in the US economy is still the labour market. Private sector employment growth in the past six months reached its fastest pace since 1998 and initial jobless claims have fallen to their lowest level since 2000.
Risk-on remains justified
The breadth of the recovery and its traction in the developed economies’ labour markets makes it the most sustainable recovery path since the 2008 financial crisis. Temporary shifts in investor sentiment and positioning will no doubt continue to create spells of volatility and the current high levels of confidence create some near-term correction risks, but these are not yet reasons to move to a defensive allocation stance. We remain overweight equities, real estate and fixed-income spread products, and are underweight government bonds.
Brazil may give cause for concern
One potential source of market worry in the near future may be the situation in Brazil and the possibility of contagion elsewhere in the emerging world. The pressure on Brazil’s markets and its economy is still increasing and every indicator is deteriorating. The need for more fiscal adjustment and more structural reforms to improve the investment climate is becoming more urgent by the day, which makes it particularly worrying that the country’s political crisis is deepening. The Petrobras corruption scandal is threatening to paralyse the whole decision-making process, with the leaders of the junior coalition partner in Congress now officially under investigation.
Bund yields decline to new record-lows
Since the start of 2015, we have seen a further decline of the 10-year German government bond yield. Since early February, the 10-year Bund yield fell below Japan’s 10-year yield for the first time on record. Since then, the German yield did not move much and traded between 0.3% and 0.4%. However, as the euro area’s €60 billion per month bond buying program came into force on March 9, the Bund yield fell from 0.4% to 0.2% in three days’ time. On March 10, Germany's 30-year bund yield dropped (intraday) below 0.75% for the first time. The reasons for the ultra-low bond yields are well-known: low growth, low inflation, loose policy by the European Central Bank (ECB) and the start of its quantitative easing (QE) program, in combination with strong demand for liquid, high-quality bonds.