Let’s not jump to conclusions, however. To start with, it seems fair to say by now that the “positioning shake-out” has progressed a long way: investments that were unloved at the end of last year have performed well year-to-date (commodities, real estate, emerging markets, Bunds and Treasuries), while assets in which investors held relatively large positions (equities in general) have lagged behind. We think that investors have squared strong concentrations of positions to a large extent by now. On top of this, investor sentiment has normalized. At the start of the year it stood at a 3-year high and not too far off the record-highs of the late ‘1990s. Since then, investors have become far less euphoric.
At the same time, the fundamental undercurrent of support for risky assets is still in place. Actually, the visibility on the evolution of the global business and earnings cycles has only increased. Weather distortions in developed market data are gradually fading, while the upward path of the “old economy” has gotten more confirmation. In March, a leading index of business surveys from the US, Germany, Japan and European peripheral countries reached its highest level since September 2007. Moreover, corporate earnings numbers point to the first double digit growth year in all developed market regions since 2011. US corporate earnings have been strong as about 70% of the companies beat expectations, although it must be said that these were not too high. Full year guidance remains cautious yet less negative than in previous quarters. In Europe, earnings were affected by the still weak global growth environment as well as the strong euro.
Next to reporting earnings, corporates also keep stepping up merger and acquisition (M&A) activity. Particularly in the health care sector a number of large deals were announced recently. At more than US$ 150 billion, the year-to-date volume of announced M&A deals in health care is at its highest level since Thomson Reuters began tracking such deals in 1980. An increasing part is financed through equities, which suggests that more companies consider their shares as attractive relative to other modes of financing. The increase in IPOs is another sign of companies trying to benefit from an improving market environment. At the same time, this rationale could also impact the heavy pace of equity buybacks and incentivize companies to invest more instead.
So, with investor positioning now less concentrated and sentiment less euphoric, fundamentals are likely to become more important market drivers. Given that these are generally resilient outside of emerging market space, it seems too early to change direction with our investment approach. Rather than selling in May and go away, it seems more prudent to stay the course with our overweight positions in equities, real estate and spread products.