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Reducing our risk profile as markets sink

Reducing our risk profile as markets sink

11-02-2016 | Insight
  • Lukas Daalder
    Lukas
    Daalder
    Chief Investment Officer

Will January forebode a poor 2016?

If you believe in the January effect – the predictive power of the returns of the first month for the rest of the year – it is clear that 2016 is not going to be a very pleasant experience for a substantial part of the financial markets. Stocks sold off in an impressive fashion during the first two weeks of the year, and failed to stage a credible bounce back in the second half of the month, ending the month down.


The sell-off was not limited to stocks though, with all risky assets posting negative returns. Despite an end-of-month rebound, oil once again was the laggard. Gold and bonds were the winners, although European bonds clearly needed the support of the ECB and BoJ to move decisively higher.

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A weak start to the year for risky assets

One-sided view of oil

So what’s next? From a fundamental perspective, the sell-off has clearly created opportunities. Markets have traded on the back of the ‘low-oil-is-purely-bad’ premise, which we continue to believe is a very one-sided way of looking at things. We do not believe that the US economy is on the verge of a recession, nor that the Chinese economy is collapsing, even though some have mistaken the Chinese stock markets to be a good leading indicator for the underlying economy. Financial markets have overshot.

Having said that, sentiment is very weak, and we are currently less confident that this overreaction will end soon. As such we stick to our overweight in risky assets but prefer to reduce our overall risk profile somewhat for now.