Thematic rotation below markets’ calm surface – NN IP

Added 26th August 2016

Seeing a thematic rotation below markets’ calm surface, NN Investment Partners is increasing its exposure to cyclical stocks by upgrading industrials and materials and downgrading healthcare.

Thematic rotation below markets’ calm surface – NN IP

It is still hesitant to move on financials however as the pressure on the net interest margin from a flat yield curve and low rates remains a headwind. 

While defensive sectors and yield plays were leading themes on markets until the beginning of the summer, the focus has since shifted towards cyclical sectors, noted NN IP. “Somewhat counterintuitively, cyclical sectors started to outperform after the Brexit vote, an event which in the preceding period was defined as a killer for confidence and growth,” said Patrick Moonen, principal strategist, multi asset, NN IP.

The impact of the vote two months after has so far been limited, in Moonen’s view. “PMI data remained stable at a seven-month high in the Eurozone and especially for the UK macro data surprised on the upside. Also more globally, macro surprises have been on a rising trend which is generally positive for cyclical outperformance,” he said.

NN IP also notes that while over the past years and especially in Europe, monetary policy was the sole instrument used by policymakers aiming to revive growth and inflation expectations, the Brexit-shock has changed the mind-set of policymakers with regards to the use of fiscal policy, something which was not up for discussion during the era of fiscal orthodoxy pushed by core Eurozone countries.

“A better balance between the two policy instruments favours on one hand the search for yield theme in fixed income assets and on the other hand the cyclical growth theme in equities. This is exactly what we currently observe in financial markets,” said Moonen.

The third element that supported the cyclical shift was the recovery in the oil price, according to Moonen. “This has a beneficial impact on the energy, the material and the industrial sectors. We do have some doubts on the sustainability of the rise in the oil price as it is not supported by an improvement in the market fundamentals,” he continued.

“Inventories remain high, the rig count increases and US production growth has become less negative. It is more the result of a short squeeze after rumoured coordinated production freezes by OPEC and non-OPEC countries,” concluded Moonen.

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