So far, investors in equities and other risky assets have been rewarded for their continued buying appetite, despite the increased concerns. “However, we believe the bullish price movement is starting to lose steam,” says Mark Dowding, Chief Investment Officer at RBC BlueBay Asset Management. “This is therefore the time to adopt a more cautious stance.”
The cost of hedging portfolios has fallen sharply in the past month, partly as volatility has eased. “After a period in which investors may have become a bit too complacent, we would not be surprised to see markets become more volatile in the coming months,” says Dowding. “Trade negotiations will return to the forefront.”
In Europe, attention is also focused on defence spending. Policymakers in the EU, led by Germany, are significantly increasing their planned defence budgets. The CIO calls the prospect that German defence spending could rise to 5% of GDP ‘drastic’.
The market seems to be underestimating the impact of this, Dowding warns. “The expected increase in German government debt and the additional supply of Bunds are not yet sufficiently priced in by bond investors.” This could have consequences for market interest rates, he expects.
