Exposure rates of the Dorval Asset Management Range – 28th May 2021

“Lost in transition” could be the title of the film currently playing out on the markets, as investors waver about whether to take the risks of overheating seriously during this phase of economic transition and statistical fog. However, many have trimmed their exposure, which could pave the way for some tactical opportunities.

Composite risk appetite indicator
Average of investor positioning indicators

The composite indicator is the average of:

·       Market risk appetite indicator (Goldman Sachs)
·       Citi macro-risk index (inverted)
·       Individual investor optimism in the US (AAII)
·       Exposure levels for US active investment managers (NAAIM)


Risk appetite has decreased significantly over the past two weeks (cf. chart 1), pointing to jitters that have been unseen over the past several months. Complex debates continue as to how Joe Biden’s stimulus program will filter through to the economy and financial markets: just how quickly will Americans spend the savings they have built up, and what kind of purchases will they make? How much inflation will this create and how long will it last? Lastly, do stock-market valuations not already largely price in the economic recovery that is getting under way? This barrage of questions has prompted a number of investors to reduce their positions. 


Yet the share price correction has been very restricted, with the market still propped up by the Fed and its extensive communication. The central bank is maintaining its stance as it endlessly hammers home its message that the current transition is the main culprit behind rising prices, and that a scenario of fiscal stimulus driving a real inflationary surge remains unlikely. The Fed acknowledges that inflation will be slightly higher over the next two years, but that is precisely the goal it is pursuing. Lastly, the institution continues to ward off accusations of irresponsibility by explaining that there will likely be a debate on the slowdown in its asset purchases by the end of the year: and the chances of this were augmented by the latest very positive labor market indicators (cf. chart 2).


The US labor market is normalizing more quickly

% of Americans who think jobs are hard to get (Conference Board survey) / New jobless claims


The Fed’s strategy seems to be effective. Some share indices seem to want to stage a breakout to the upside, as suggested by the recent surge on the Euro Stoxx 50 (cf. chart 3). Meanwhile, more recent European economic momentum has been very encouraging, and the rise in the euro diminishes the risk of a shift in stance from the ECB. We have tactically strengthened our equity exposure, particularly on our European flexible funds. The markets could try to get over the “wall of worry” on inflation over the weeks ahead. However, we will remain very responsive during this challenging phase on the financial markets.


End of consolidation on the Euro Stoxx 50?


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