Market environment has become supportive for risky assets

The drama that erupted in June when UK voters chose to leave the European Union has since morphed into a domestic British situation.

Market and sentiment channels have transmitted little or no Brexit-shock into the real economy elsewhere in the world, and recent economic data indicate that mainland Europe, the region most at risk of contagion, has been remarkably resilient in the weeks since the referendum. The positive feedback loop that has developed between markets and economies may be the best evidence yet that the fallout from the Brexit vote is far less dire than many feared two months ago.

Economic and earnings data have been a support factor for global markets this summer. Macro numbers have shifted up, with positive data surprises in developed markets reaching a 2.5-year high this month. Second-quarter corporate earnings in the US and in Europe also came in better than expected.

The policy and political dynamics are also improving. The global policy mix is shifting to an easier stance yet again, with the Bank of England and the Bank of Japan both easing further and, like the European Central Bank, remaining biased to do more. The fiscal gears are also starting to turn. Japan’s government announced a large stimulus package and the US and UK governments are hinting at fiscal stimulus measures in the 2017-18 period. On the political front, there are rays of hope for the emergence of a Spanish government, some signs of UK political stability under the new government and declining poll numbers for US presidential candidate Donald Trump, all of which may have helped reduce political risk premiums.

The sunny summer climate, it seems, has begun to entice cash-rich and cautious investors back into the market. These are investors who have to shake off not only their Brexit fears, but also their memories of volatility shocks that took place during almost every previous summer of the past decade. With investor sentiment turning positive for the first time this year and investors’ cash levels reaching 15-year highs in June, according to the Bank of America/Merrill Lynch Fund Manager Survey, the right conditions to put some of that money back to work in the market are emerging.

The flow momentum that has emerged on the back of all this seems likely to remain a support factor for risky asset classes like equities, real estate and fixed income spread products, at least until either technically overbought levels are reached or new macro or political shocks occur. With neither of those on the radar at this stage, we keep our risk-on stance tilted to the asset classes mentioned above.

Valentijn van Nieuwenhuijzen – Chief Strategist e Head of Multi Asset – NN Investment Partners