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More than half of professional investors see their risk appetite rising, says NN IP

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Investors’ views are mixed on the outlook for the global economy according to NN Investment Partners’ (NN IP) Investor Sentimeter which shows that just over a quarter (26 per cent) of professional investors believe global economic momentum will accelerate over the next 12 months, versus 39 per cent who believe it will decelerate and 35 per cent who expect it to remain the same. 

However, the Sentimeter shows that most investors (57 per cent) anticipate their appetite for risk will increase over the next year, including 14 per cent who expect this increase to be ‘significant’. Only 19 per cent expect it to decrease. The appetite for risk has risen compared to the results of last year’s survey, when 32 per cent expected their risk appetite to grow and 48 per cent expected it to decrease.
 
Currently, more than half of investors (51 per cent) say they will increase their allocation to equities within the next year. Other asset classes where they also expect to invest more include fixed income (38 per cent) real estate (38 per cent); hedge funds (30 per cent); commodities (27 per cent) and private equity (27 per cent).
 
Ewout van Schaick, Head of Multi Asset at NN Investment Partners, says: “It is understandable that investor sentiment around global economic growth is divided as the outlook is also quite binary. It depends heavily on political uncertainty (eg US China trade war policy and Brexit) and the effectiveness of policy stimulus.

The slowdown in global growth in 2019, is mainly the result of heightened political risk which dampens business confidence and capex. So far central banks have been able to limit this slower growth’s impact on markets, but the effectiveness of monetary policy is diminishing, and further easing could even harm the economy. A better policy balance with more fiscal easing on top of loose monetary policy will be needed, but will there be sufficient political support for this?”
 
Despite the uncertain outlook, it is interesting that investors in NN IP’s Sentimeter still expect their risk appetite to rise in 2020. This would seem to imply that their assessment is not based on widespread confidence in an economic rebound, but more on the lack of an alternative strategy.
 
Van Schaick says: “Yields on governments bonds are at extremely low levels – in negative territory in many European countries – and the spreads on safer corporate bonds are not much higher. This means that investors are compelled to take more risk to be able to meet their return targets. As most currently have only modest allocations to equity,  we can expect to see stronger flows into the asset class.”
 
“We recognise the sentiment expressed in the survey towards equity as the preferred asset class. If political risks are kept under control and policymakers opt to increase fiscal spending, there will be ample room for the current high equity risk premium, which is pricing in some secular stagnation risks, to come down. In this environment, equities will also be our preferred asset class and we may see a big shift from ‘growth’ into ‘value’ and away from the US into other markets. If this occurs, we would expect the Eurozone and the Japanese markets to be the biggest beneficiaries. In this preferable scenario, Financials will also outperform the bond-proxies.
 
However, trade conflicts, Brexit and other political uncertainties continue to overshadow the market and there is no evidence yet in the economic data that the slowdown is over. Within our multi-asset portfolios, we therefore stay on hold for now and maintain a more neutral equity allocation. If economic data provide clear signs that the growth picture stabilises and/or real resolutions are found for the various political uncertainties, we will be ready to add to European and Japanese equity and position for a style and sector rotation in 2020. 
  
The low-yield environment does not only drive investors into equity. Many investors are limited in the amount of equity risk they are able or willing to take. The search for yield will continue to drive flows into higher risk spread products like emerging market debt and less liquid alternatives like mortgages. 

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