Are investors overly wary in the currently ragged environment for risk assets?
In looking at the current market climate, something that I find particularly striking is the dichotomy between investor sentiment and the changing global risk environment.
Across the board, measures of investor sentiment—whether fund flows or investor surveys—have recently reflected real skepticism about market prospects. According to the American Association of Individual Investors, for example, neutral or bearish sentiment stands at about 70%; that’s a bit better than it was but is higher than the historical average of roughly 60%.1 Lipper has reported continued flows out of U.S. equity mutual funds.2 And a few weeks ago, a BofA Merrill Lynch survey found that global fund managers were positioning themselves for an array of potential shocks in the coming months.3
Litany of Fears
It’s easy to understand all the skittishness.
Negative headlines have been everywhere. The U.S. presidential election is one of the most inflammatory in recent memory, revealing a disturbing reservoir of economic resentment and creating an aura of unpredictability that is never good for markets in the near term. Politicians driven by nativist and socialist ideas have been gaining traction globally, with an extreme right party nearly gaining power in Austria. More immediately concerning, investors continue to assess the diminished, but still real, risk of a Brexit vote on June 23, and mull the political and economic crisis in Brazil. Meanwhile, fears over China’s growth have persisted, while recent statements by Janet Yellen have raised the specter of a Fed that could raise rates too fast in a climate where corporate earnings remains challenged.
A Shortened Tail
Still, for the most part, many of the drivers of tail risk that we’ve identified in this space have actually improved in the last few months. For example, the expensive dollar that has pressured earnings among large-cap U.S. companies has eased by about 5% (U.S. Dollar Index) since the end of January; oil is up, and at close to $50 (Brent) appears to be approaching a sweet spot that reduces strains on the oil patch but keeps fuel relatively affordable for consumers. More broadly, commodity prices generally have steadied, to a large degree based on a perception of stabilization in China, which itself has been a key driver of uncertainty.
Over the past few months, we’ve highlighted positives that have been peeking through the prevailing cloudy views on the markets. In Europe, for example, the perception of perpetual crisis obscures economic improvements and the strong positioning of some companies, offering up a long-term value opportunity. Emerging markets, although not yet in recovery, are benefiting from a shift to more market-friendly leadership, as well as the general stabilization of oil and the U.S. dollar. The latter trend, combined with a still accommodative Fed, could support wage and profit growth in the U.S.
Mixing Realism and Return
This is not to say that we are effusive about the current climate, but we believe assets are more apt to perform in line with the fundamental picture—both positive and negative. So, in our view, sovereign bonds have a low to negative return outlook, equities a modest return outlook, and credit falls somewhere in the middle. In other words, the balance of risk and reward across assets could lead to more normalized long-term relative return relationships.
That’s not to say that recently dominant risks couldn’t reassert themselves. Energy prices could experience another drawdown, Brexit could cause heightened angst in coming weeks, China could again disappoint. But overall we favor putting aside near-term distractions and maintaining consistent exposures across a diversified portfolio.
In Case You Missed It
- U.S. Personal Income and Outlays: Personal spending increased 1.0%, incomes increased 0.4%, and the savings rate decreased to 5.4% in April
- Case-Shiller Home Prices: March home prices increased 0.9% month-over-month and increased 5.4% year-over-year (NSA); +0.9% month-over-month (SA)
- U.S. Consumer Confidence: -2.1 to 92.6 in May
- Eurozone Purchasing Manager Index: -0.2 to 51.5 in May
- ISM Manufacturing Index: +0.5 to 51.3 in May
- European Central Bank Policy Decision: The Governing Council made no changes to its policy stance
- U.S. Employment Report: Nonfarm payrolls increased 38,000 and the unemployment rate declined to 4.7% in May
- ISM Non-Manufacturing Index: -2.8 to 52.9 in May
– Justin Gaines, Investment Strategy Group
Statistics on the Current State of the Market – as of June 3, 2016
|
Market Index |
WTD |
MTD |
YTD |
|
Equity |
|||
|
S&P 500 Index |
0.1% |
0.1% |
3.7% |
|
Russell 1000 Index |
0.2% |
0.2% |
3.7% |
|
Russell 1000 Growth Index |
0.3% |
0.3% |
2.0% |
|
Russell 1000 Value Index |
0.1% |
0.1% |
5.5% |
|
Russell 2000 Index |
0.8% |
0.8% |
3.1% |
|
MSCI World Index |
0.2% |
0.3% |
2.4% |
|
MSCI EAFE Index |
0.2% |
0.2% |
-0.5% |
|
MSCI Emerging Markets Index |
1.1% |
1.1% |
3.6% |
|
STOXX Europe 600 |
-0.6% |
0.0% |
-0.7% |
|
FTSE 100 Index |
-0.9% |
-0.3% |
1.5% |
|
TOPIX |
-0.9% |
-3.1% |
-12.7% |
|
CSI 300 Index |
4.2% |
0.6% |
-14.2% |
|
Cash & Fixed Income |
|||
|
Citigroup 2-Year Treasury Index |
0.2% |
0.2% |
0.9% |
|
Citigroup 10-Year Treasury Index |
1.2% |
1.2% |
5.8% |
|
Barclays Municipal Bond Index |
0.2% |
0.2% |
2.9% |
|
Barclays US Aggregate Index |
0.6% |
0.6% |
4.1% |
|
Barclays Global Aggregate Index |
1.5% |
1.7% |
7.6% |
|
S&P/LSTA U.S. Leveraged Loan 100 Index |
0.1% |
0.0% |
5.6% |
|
BofA Merrill Lynch U.S. High Yield Index |
0.0% |
0.0% |
8.2% |
|
BofA Merrill Lynch Global High Yield Index |
0.6% |
0.5% |
8.3% |
|
JP Morgan EMBI Global Diversified Index |
0.9% |
0.9% |
7.7% |
|
JP Morgan GBI-EM Global Diversified Index |
1.5% |
1.6% |
9.4% |
|
U.S. Dollar per British Pounds |
1.8% |
-0.3% |
-1.5% |
|
U.S. Dollar per Euro |
-0.3% |
1.8% |
4.3% |
|
U.S. Dollar per Japanese Yen |
3.9% |
3.9% |
12.7% |
|
Real & Alternative Assets |
|||
|
Alerian MLP Index |
2.9% |
2.6% |
12.0% |
|
FTSE EPRA/NAREIT North America Index |
1.0% |
1.0% |
6.8% |
|
FTSE EPRA/NAREIT Global Index |
1.2% |
1.2% |
6.1% |
|
Bloomberg Commodity Index |
2.1% |
2.1% |
11.1% |
|
Gold (NYM $/ozt) Continuous Future |
2.1% |
2.1% |
17.2% |
|
Crude Oil (NYM $/bbl) Continuous Future |
-1.0% |
-1.0% |
31.3% |
Source: Factset, Neuberger Berman LLC.
1 Source: AAII Investor Sentiment Survey, as of June 1, 2016.
2 Source: Lipper Fund Flow Report, as of June 1, 2016.
3 Source: BofA Merrill Lynch Fund Manager Survey, May 17, 2016.
This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Neuberger Berman products and services may not be available in all jurisdictions or to all client types.
Investing entails risks, including possible loss of principal. Investments in hedge funds and private equity are speculative and involve a higher degree of risk than more traditional investments. Investments in hedge funds and private equity are intended for sophisticated investors only. Indexes are unmanaged and are not available for direct investment. Past performance is no guarantee of future results.
The views expressed herein include those of the Neuberger Berman Multi-Asset Class (MAC) team and Neuberger Berman’s Asset Allocation Committee. The Asset Allocation Committee is comprised of professionals across multiple disciplines, including equity and fixed income strategists and portfolio managers. The Asset Allocation Committee reviews and sets long-term asset allocation models, establishes preferred near-term tactical asset class allocations and, upon request, reviews asset allocations for large diversified mandates. The views of the MAC team or the Asset Allocation Committee may not reflect the views of the firm as a whole and Neuberger Berman advisers and portfolio managers may take contrary positions to the views of the MAC team or the Asset Allocation Committee. The MAC team and the Asset Allocation Committee views do not constitute a prediction or projection of future events or future market behavior. This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.
This material is being issued on a limited basis through various global subsidiaries and affiliates of Neuberger Berman Group LLC. Please visit www.nb.com/disclosure-global-communications for the specific entities and jurisdictional limitations and restrictions.
The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC.
Certain products and services may not be available in all jurisdictions or to all client types.
© 2009-2016 Neuberger Berman LLC. | All rights reserved
