Risk Appetite: The Agony or the Ecstasy?

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risk appetite

Global financial markets are feeling quite apprehensive these days. Three of the four risk appetite indicators that Credit Suisse tracks are in panic territory, and the fourth is fairly close to it. But as is so often the case, the stampede is happening a little late – a reaction to a growth scare from five months ago, rather than a reflection of the future that leading indicators foretell.   Credit Suisse’s indices that track risk appetite for equities, U.S. credit, and U.S. long-term fixed-income products are flashing red for a variety of reasons. Before we get to that, though, a quick primer on measurement: The four indices measure risk appetite by comparing how well risky assets perform relative to safe ones. When risky assets strongly outperform safer ones, investors are clearly confident, while a flight to safer securities can signal concern, nervousness, or even panic.   So how are investors in different asset classes feeling? Equity risk appetite is weak. Investors are huddling for safety in low-volatility markets such as the U.S. and eschewing riskier alternatives such as emerging markets. Risk appetite in U.S. credit is low as well. You can see that as investors dump bonds in energy companies that make up 20 percent of the high-yield bond market in favor of other assets – and judging from the continuing decline in yields, those assets likely included 10-year U.S. Treasury yields and German bunds.   A broader global measure that tracks demand for government bonds and equities in developed and emerging markets is teetering on the edge of panic, too. Investors seem quite concerned about weak global growth, particularly in Europe, where deflation is no longer theoretical – consumer prices dropped in December 2014 for the first time since 2009 – and the election of an anti-austerity party in Greece has raised the specter of a “Grexit” once again.   Credit Suisse says the current level of panic is overblown. The bank’s economists believe the world is headed for a year of above-average industrial production and solid economic growth. A rolling three-month measure of global industrial production growth has gone from a low of 1.2 percent in August to an expected 5.3 percent in January. While it may moderate from there, growth should remain above 3 percent through the first half of 2015. In the United States, the same measure is at 7 percent, which is close to a historic high. U.S. unemployment, meanwhile, is at 5.6 percent, the lowest it’s been since June 2008. And despite stalling in December, retail sales have been growing at a healthy clip for the last few months – a trend that will surely get a boost as American consumers face lower prices at the pump.   Although growth patterns in other large economies are undeniably weaker than in the U.S., they do offer a few glimmers of hope. Car sales, retail sales and industrial production have all picked up in Europe, and leading indicators such as consumer confidence have also been looking perkier in recent months. Low oil prices should be a major boon for consumers in China, the world’s largest energy importer, moderating the effects of a growth slowdown as the country transitions from export powerhouse to consumer-led economy. Even Japan, where consumer demand, retail sales, and industrial production growth all collapsed after a tax hike in April, shows some signs of normalizing. Auto sales soared in December, and oil prices are benefitting not only Japanese households, but companies too, which have accelerated hiring.   “We’re starting the year in a panic, but later in the year, we can expect euphoria if there is steady improvement in the U.S. labor market and global growth picks up,” James Sweeney, Credit Suisse’s Chief Economist for the Investment Bank, said on a recent call with clients. “That’s much more likely to happen than the markets would have you believe.”

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