This year’s market rally led to plenty of speculation that “risk-on” trading is back to stay after the fear which characterized much of 2011. But the time for a long-term move to risk-on is not quite here, according to William De Vijlder, global chief investment officer, BNP Paribas Investment Partners.
“There’s a bit of fatigue with risk-on trades. They last for a couple of weeks and then change. It’s more investors looking for a catalyst that would take risk-on off the table,” he told CNBC Friday. “The real issue that we are facing is that people are re-assessing what’s happening in emerging markets.”
The prospect of a hard landing for China’s economy re-emerged with a vengeance this week after disappointing industrial data on Thursday.
Rising oil and gas prices, combined with the output gap– which measures how far away an economy is from a targeted level of output – are causing concern about emerging markets.
Brazil has embarked on an aggressive interest rate-cutting program to try and restore struggling industries to life.
“Investors are really on their toes,” De Vijlder said. “The ultimate vindication of risk-on for a more lasting perspective hasn’t been seen yet. You would need to see a lasting sell-off in the safe havens – bunds and Treasurys. The big move was out of cash into risky assets, and I think this will continue. People can’t just sit there earning negative yields for eternity.”
If investors are moving out of cash, some strategists believe that European shares may start looking attractive again – even though recent data indicates that the euro zone will soon officially be in recession again.
“You get a sense that there is a groundswell of opinion that wants the market to go down…With attention turning to Spanish bond yields as they appear to back up, the more positive minded folk are in for a tough time,” Rob McCreery, founding partner at Libra, wrote in a research note.“All of this is providing another buying opportunity in our view.”
He added that when the SXXP —the Stoxx Europe 600 Price Index—comes back to rising value, it will be a buy and that moment is “very close” as fair value for the SXXP is 264.04.