As we hit the year’s halfway point, investors are faced with an unusual phenomenon in global markets: riskier assets like equities have rallied alongside their safer peers like bonds and gold. Does this mean the asset classes are sending conflicting signals? Not necessarily, says Goldman Sachs Research’s Christian Mueller-Glissmann. We sat down with him to discuss this apparent disconnect in risk appetite and the outlook for the second half.
Christian, your indicator measuring investor appetite for risky assets has climbed in recent weeks, yet interest in safe assets has soared at the same time. What do you make of this market behavior?
Christian Mueller-Glissmann: The reason lies partly in the fact that at the moment, the main driver of risk appetite is monetary policy, which boosts demand for both risky and safe assets. Global inflation expectations have decreased amid a rising emphasis on risks to economic growth, causing central banks around the globe to turn more dovish. Investors are expecting interest-rate cuts, and so are searching for yield anywhere they can find it. This has also driven an unusual gap between the S&P 500, which is hovering near all-time highs, and global 10-year bond yields that are heading towards all-time lows. Interestingly, the leaders within equities — and risky assets more broadly — have been defensive plays. For instance, low-volatility stocks in the S&P 500 have posted one of the best performances across assets and in history year-to-date.
How do different asset classes usually behave during monetary easing cycles?
CMG: We just upgraded bonds to neutral over a three-month horizon given that historically, bond yields tend to continue falling after the Fed cuts for the first time. But the performance of risky assets during easing cycles ultimately comes down to economic growth. Growth needs to take over as the main driver of risk appetite before a sustained cyclical rotation within and across assets becomes more likely, but global growth has continued to soften.
Will global growth pick up in the second half?
CMG: Our economists think a recovery is still likely, especially given that data has disappointed in recent months and financial conditions are easing. While there are plenty of risks to this view from both a political and policy standpoint, the pick-up should drive a rotation into more cyclical areas of the market. Still, the fact that we’ve experienced a “bull market in everything” means multi-asset portfolios will likely deliver lower returns and run the risk of not being well-diversified, so we remain overweight cash over 12 months.
What are your asset allocation preferences for the second half of the year?
CMG: In the near term, markets remain vulnerable to rate and growth shocks, which could be triggered by weaker data or political risks like an escalation in trade tensions. As a result, we remain relatively neutral on risk over the next 3 months. We are looking to add some risk into year-end, however — we are overweight equities, neutral on credit and commodities, and underweight bonds over a 12-month horizon. More specifically, we would lean towards selective cyclical pockets of growth and avoid very defensive parts of the market, which have done very well this year.
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