We recently raised our Dynamic Risk Score from a 5 to a 6 as a result of the following influences:
- Improved valuations
- Expected oil price stability
- Continued strength of global economic fundamentals
- Reduced Eurozone political risks
Our decision to increase the Dynamic Risk Score reflects our belief that we are currently in an environment that is more conducive to risk taking than that of early 2017. Further, the increased score means that we expect risk products to outperform Treasurys over the next three to six months. We will continue to monitor the market, but for now we have increased the score for a number of reasons:
- Improved valuations because of uncertainty and disappointment with U.S. fiscal policy
The recent failure of the ACA repeal vote highlights the continued toxic environment in Washington D.C., and caused risk assets to cheapen. However, we feel a corporate tax-reform bill is still likely and will more meaningfully support the recent boost to business confidence and activity.
- Expectation for oil prices to stabilize and move higher by mid-year
There is a 70% to 75% probability that OPEC will extend its production cuts for an additional six months. The extension of the cuts, alongside the higher-demand summer season, will lead to inventory draws and will provide the foundation for prices to rise.
- Continued underlying strength in global economic fundamentals
Strong U.S. wage data and job data, combined with strong Eurozone PMI, show continued core-strength in global economic fundamentals. In fact, most are ignoring a possible lower-than-expected first-quarter GDP print because of historic seasonality concerns.
- Reduction in Eurozone political risks
Following the lackluster populist results in the Netherlands and the increasing lead of Macron over Le Pen in France, fears of a significant populist, anti-European Union surge, has dissipated. Brexit negotiations and the Greek debt situation will continue to unfold over the foreseeable future, but do not currently cause a significant level of concern.
Unless otherwise noted, the information in this document has been derived from sources believed to be accurate as of March 2017. Information derived from sources other than Principal Global Investors or its affiliates is believed to be reliable; however, we do not independently verify or guarantee its accuracy or validity. Past performance is not necessarily indicative or a guarantee of future performance and should not be relied upon to make an investment decision.
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