Risk reward still attractive

Risk premia in equities and bonds remain attractive despite sentiment indicators recovering from the August/September market correction, according to NN Investment Partners.

NNIP analysis measures the current global equity risk premium at 4.3 percent, which compares favorably to the long-term average of 3 percent. The premium for holding longer-dated government bonds – measured as the difference between 10- and two-year treasury yields – is currently around 1 percent, which is in line with the long-term average. As such, buying longer-term bonds is still rewarded despite the low absolute yield levels and NNIP believes the asset class is not hugely expensive.

Valentijn van Nieuwenhuijzen, head of multi-asset at NN IP, commented: “Positioning and sentiment did fall to extreme levels at the end of September. A stabilisation in the oil price and emerging market data combined with a dovish ECB (European Central Bank) and a rising US dollar was enough to turn markets round. It is also noteworthy that the Fed (Federal Reserve) expectations did not have a lasting impact on German government bonds. The 10-year bund is flirting with the 50 basis points (bps) frontier and remains in the middle of its trading range. Today, investor sentiment has become more neutral, although the consensus underweight in commodity-related assets, including emerging markets, remains well in place.

“Of course, risks can change and maybe we need to assume a somewhat higher risk premium to take a terrorist fear factor into account. It is currently too early to draw any firm conclusions and the eurozone equity risk premium is already above its long-term average.  As far as the economic consequences are concerned our base case for now is that they will be limited. In this respect, we are of the view that the terrorist attacks in Paris are mostly comparable to the Madrid bombings in 2004 and the London bombings in 2005. Having said that we do recognise the risk that the consequences could be more long lasting, especially if it turns out that the attacks are the start of a sustained terrorist campaign.”