Summit News

One of biggest 2021 risks is market crowding: NN CIO

LONDON (Reuters) - One of the biggest risks to the bullish equity market consensus for next year is that investors are all leaning the same way and market overcrowding could stall the rally early on, NN Investment Partners’ Chief Investment Officer said.

FILE PHOTO: The Charging Bull or Wall Street Bull is pictured in the Manhattan borough of New York City, New York, U.S., January 16, 2019. REUTERS/Carlo Allegri/File Photo

Valentijn van Nieuwenhuijzen, who helps to manage NN IP’s 295 billion euros ($356.09 billion) of assets, told Reuters Global Investment Outlook Summit, 2021 that he broadly agrees with the consensus on overweight in equity and risk assets going into 2021. But there could be problems during the year.

“We are strong believers in the evolution of markets and behaviour of our peers is something we monitor very closely,” he said. “If we think consensus in thinking is changing into a large consensus of behaviour, with everyone rolling ino equities and the same type of strategies, that could create more volatile markets somewhere late Q1 or early Q2.”

Reuters polling has consensus forecasts for another gain of almost 10% in Wall Street’s S&P500 next year as COVID-19 vaccines are rolled out and the global economy recovers while massive monetary and fiscal policy supports persist.

Van Nieuwenhuijzen said those consensus calls were reasonable, but he would favour European equities - not least because of post-pandemic stimulus plans in place there and after an extraordinary volte face from Germany on budget limits.

Disappointment on either U.S. or European fiscal policy was another potential risk to a market that has already priced in considerable expectations.

“All of us are assuming substantial fiscal support in the euro zone and United States but, on both sides, we have some issues,” he said, referring to post-election gridlock in the United States and objections from Hungary and Poland to the new European Union budget.

Assumptions a new U.S. administration will immediately ease tensions with China may also be wide of the mark, he said.

But van Nieuwenhuijzen reckoned central banks were unlikely to roll back support soon. A jump in inflation was a low probability/high risk event, he didn’t see a change in the broader inflation, interest rate or debt picture for 3-5 years.

“Central banks will be super committed,” he said. “With massive output gaps, I doubt that over a 3-5 year horizon there will be any change in the picture of debt levels or inflation.”

Bonds with rock-bottom yields may be challenged as a defensive asset in portfolios, he said, but there is always the option of a return to cash in times of crisis. And alternatives - including private credit markets - are increasingly popular diversifiers.

“Alternatives is the strongest growth segment next to sustainability,” he said.

Van Nieuwenhuijzen also spoke about:

* Risks to Big Tech stocks that have led markets higher this year, including rotation as recoveries broaden as well as tax, regulatory and antitrust pushbacks. “In a lot of our sustainable strategies we play the tech theme, but we have downscaled the size spectrum to be less sensitive to the biggest names.”

* Emerging markets “have turned a corner for now though there is a bit of dependency on news around the Astrazeneca’s vaccine, which is easier to deploy in EM.”

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($1 = 0.8284 euros)

By Mike Dolan, Additional reporting by Sujata Rao; editing by Barbara Lewis