Fears and fragility Valentijn van Nieuwenhuijzen Head Multi-Asset

1. Fears and fragility
Valentijn van Nieuwenhuijzen
Head Multi-Asset

2. Market volatility has increased again at the start of the year due to intensified worries over Chinese growth
weakness, geopolitical tensions and a further fall of the oil price. Although a lot of bad news is already priced
in, we prefer to maintain a cautious positioning.
Well-known fear factors are back on the table again…
After a somewhat calmer holiday season at the end of last year,
investors might be forgiven for feeling they are playing a part in a new
Groundhog Day movie after the first trading days of the year. In many
respects the well-known fear factors from 2015 are back on the table
again. Ongoing market fragility is reflected by a renewed spike in
market volatility as intensifying worries over growth weakness in
China, geopolitical tensions and oil price de-clines are on the
headlines again. Also comparable to last year is that broad-based risk
aversion in markets is not triggering massive safe haven flows into
global government bond markets, as yields have only dropped
modestly and are still trading close to their 3-month average.
Does this mean that nothing will change in 2016 and that we will all
start feeling like Bill Murray walking through the village of
Punxsutawney, with everything that already happened the day before
(read: last year) happening all over again? Obviously we cannot
exclude this, but it does seem highly unlikely. Change is the only
constant in life and this will not be different for financial markets in
2016.
Still, many things look the same from both a fundamental and
behavioural perspective. Global growth is steady with support from
DM and risks in EM, China remains a crucial swing factor for both
global trade and commodity markets, lack of supply constraints in the
oil market continues to add fuel to the fire for commodity sensitive
market segments (US HY, EMD, energy/materials sectors) and investor
sentiment, and flows and positioning all continue to reflect a cautious
tone.
…although the starting position is very different from last year
At the same time, there are some important differences that might well
drive markets into patterns that are unlike those seen last year. Much
stronger divergence in central bank policy (the Fed hiking, the ECB &
BoJ still easing, mixed bag of hikes and cuts in EM space) is one of the
most important ones. Furthermore, the degree of healing in DM labour
markets is also much further progressed and the peripheral recovery is
on a much stronger footing (even the Greek PMI is back above 50
again!). Also, the large repricing of EM assets last year and other
oil-sensitive assets create a very different starting position compared
to a year or even 6 months ago. As a result, much more misery is
already priced in these market segments which dampens the degree
to which further contagion into other parts of markets and the global
economy could materialize.
While these differences provide some hope on a less volatile market
backdrop for the upcoming year, it should also be noted that some
new dark forces have emerged which cloud the horizon a bit more.
Increasing geopolitical tension in the Middle-East (Saudi-Iran tension,
on top of the war against IS and the Turkey-Russia dispute) is one
factor, while also political fragility in Europe has increased again with
the refugee crisis driving populism higher in many countries and
pushing Brexit risk to all-time highs. Furthermore, Spanish and
Portuguese politics are increas-ingly unclear again and the upcoming
US elections seem more unpredictable than ever. And finally, the
global corporate earnings growth outlook is more challenging than in
the last three years.
We prefer to stay modest in our risk taking
With respect to our asset allocation stance this means that we will
stay relatively modest in our risk taking. With limited signs of a
near-term acceleration in either economic growth or profits and no
signs yet of extremely cau-tious sentiment and positioning (which
would be a contrarian signal) we therefore prefer a rather defensive
positioning.
Valentijn van Nieuwenhuijzen
Head of Multi-Asset

3. About NN Investment Partners
NN Investment Partners is the asset manager of NN Group N.V., a publicly traded corporation. NN
Investment Partners is head-quartered in The Hague, The Netherlands. NN Investment Partners
manages in aggregate approximately EUR 180 bln* (USD 202 bln*) in assets for institutions and
individual investors worldwide. NN Investment Partners employs over 1,200 staff and is active in 16
countries across Europe, Middle East, Asia and U.S.
As of April 07, ING Investment Management has renamed to NN Investment Partners. NN
Investment Partners is part of NN Group N.V., a publicly traded corporation. Currently NN Group is
16.2% owned by ING Group. ING intends to divest the remaining stake in NN Group before 31
December 2016, in line with the timeline ING has agreed with the European Commission.”
*Figures as of 30 September 2015
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