NN IP: Open to opportunity

They worry about falling inflation and about the risk of an inflation shock. They fear technological disruption destroying jobs and stress about a permanent loss of productivity growth. They wonder if insufficient regulation will feed the build-up of a new banking crisis and suggest that excessive regulation is distorting incentives and efficient resource allocation needed to enhance future growth. They worry, whatever happens.

Given the crisis-prone decade we are living through this is emotionally understandable, but it is obviously an expression of excessive pessimism. It clearly does not indicate that there are no risks left, but it does make clear that many will be overlooking opportunity when it passes by. Modest market volatility might sometimes be caused by investors that have become overly complacent, but can also be created by a large range of other factors. Low volatility in macro data, changes in market structure due to the rise of passive investing and central bank QE and herding behaviour in volatility-selling by yield searching investors are just a couple of examples of such low-vol drivers. Moreover, much of the remaining circumstantial evidence does not hint at excessive risk-taking by investors at all. Cash levels in investor portfolios remain above long-term averages, investor sentiment surveys are generally in the "neutral" zone and valuations of defensive assets (like bonds) look more stretched than those of risky assets like equities.

So maybe we should worry more about missing new opportunities than about what could go wrong. Even politics have started to surprise on the upside, at least compared to the depressed expectations at the start of the year (with maybe a notable exception for the UK on this topic). For the US, the latter mainly means that protectionist and geopolitical headwinds have not materialised to such an extent as expected. For Europe, however, political headwinds have not only faded, but it seems that even some tailwinds have emerged with a more unified intra-European spirit and unexpected prospects of reforms in France. On top of the latter even Italy risks are fading, with support for populist parties no longer rising and finally some progress in dealing with the insolvent parts of the Italian banking sector.

Meanwhile, European economic data and profit growth expectations are currently among the strongest in the world. The European labour market continues to heal at a remarkably fast pace and by now more than 6 million new jobs have been created since the peak of the euro crisis (of which more than 4.2 million outside of Germany!). It therefore may not be surprising that household confidence (last week's EC survey) and corporate sentiment (this week's German Ifo index) have recently reached new post-crisis highs.

As always, there remains more than enough to worry about in our lives, certainly also in Europe. But before you join the herd of fear mongers, please open your mind to the option that Europe might also offer new opportunities. This more constructive thinking might create a challenge for European government bond markets, as it also helps to increase the ECB's willingness to consider tapering its QE program later in the year. At the same time, however, it clearly offers excess return opportunities for European corporate credit and high yield markets and European equity markets. The latter are our favourite parts of global financial markets, while government bond markets are the most disliked part at this point. Worries should never be overlooked, but please also realise that exploiting opportunities is eventually what makes us move forward.