WHERE ARE WE ON RISK VERSUS REWARD
On March 13th 2020, in the eye of the storm of the COVID-induced sell-off, Goldman Sach’s Risk Appetite Indicator was signalling a buying opportunity. A strong equity market rally later, the same indicator has returned all the way back to neutral. In other words, it is sending neither a buy nor sell signal – indicating that the easy money has been made and the risk versus reward trade-off is much more finely balanced.
Market participants will also be wary of another indicator signalling caution – the so-called put/call ratio. This compares investors purchasing put options, i.e. betting on a falling market, against those purchasing call options, i.e. betting on a rising market. The ratio is now at multi-year lows.
These indicators help investors navigate markets. Indeed, the latter suggests markets might get a little choppier over the coming weeks – with today and, in particular, yesterday being a case in point.
Although global stock markets are down less than 2% for the week, the year-to-date out performers – namely the FAAMG stocks – were hit the hardest yesterday, falling 4-8% and contributing heavily to the index decline. In fact, yesterday was a real rotation day with the bottom six stocks in the index, by market capitalisation, actually rising. Other signs of froth are also emerging in the US equity markets. Just last week, half a dozen technology groups, including Snowflake, Unity and Asana unveiled initial public offering prospectuses.
Another item on investors’ radar is where the global economy is currently located in the industrial production cycle. Global industrial production collapsed in April. Since then it has risen significantly – with some commentators expecting it to continue to rise every month for the rest of the year although at a reduced pace. This should act as a dampener on market returns.
On one hand, it looks like the easy gains in equity markets have been made. On the other hand, the market is expecting low interest rates to persist for the coming few years and good economic growth to return. This backdrop remains supportive for equities but it may pay to hold portfolio protection should markets become choppier in the months ahead.
Risk Warnings
Please note that the investments referred to in this document are subject to market fluctuations, there can be no assurance that appreciation will occur and it may be possible that losses will be realised.
Past performance is not necessarily a guide to future performance and the value of investments can fall as well as rise.
