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Director‟s Cut
Peaking risk aversion
Given the strong interest in the question as to whether the current “risk on” trend
can continue, we created a risk aversion indicator to check whether the rise in
equity markets is confirmed by risk trends across other asset classes.
Our risk indicator peaked at 2.89 standard deviations above the long-term
average on 3 October. This was the second highest level of risk aversion in the
last 20 years, with a peak at over 5 standard deviations post the Lehman
collapse. That said, overall risk levels have fallen rapidly this month, with our
indicator showing risk aversion fell to 2.05 standard deviations on 14 October.
Investors‟ growing appetite for risk is highlighted by the rise in bond yields, which
are now 54 basis points above their recent low. While high yield credit spreads
are still rising, albeit at a slower pace, we are seeing contracting credit spreads
for AAA rated US corporates. Looking at currencies, the waning strength in the
USD and Yen also shows that investors are taking on more risk.
Turning to the equity market components in the risk indicator, the fall in the VIX
since early October shows volatility is down, while there has also been a greater
preference for small over large caps, cyclicals over defensives and emerging
over developed market stocks. So far growth is still outperforming value, but this
is likely to reverse if the current „risk-on‟ rally is sustained.
The outlook for earnings revisions is also more positive over coming months.
EPS cuts are normal in September as US analysts prepare for Q3 results, but
October is less negative, while November tends to see positive revisions.
Risk aversion has fallen dramatically since a peak on 3rd October and
continued falls would be positive for risk assets, particularly equities
Highlights
Brad Zelnick has initiated on IBM with an Outperform as it‟s leveraged to
several macro trends driving growth in the technology industry.
Toby Williams has upgraded Fast Retailing (9983 JP) to Outperform due to
higher earnings estimates and recent share price weakness.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Director‟s Cut
Peaking risk aversion
Given the strong interest in the question as to whether the current “risk on” trend
can continue, we created a risk aversion indicator to check whether the rise in
equity markets is confirmed by risk trends across other asset classes.
Our risk indicator peaked at 2.89 standard deviations above the long-term
average on 3 October. This was the second highest level of risk aversion in the
last 20 years, with a peak at over 5 standard deviations post the Lehman
collapse. That said, overall risk levels have fallen rapidly this month, with our
indicator showing risk aversion fell to 2.05 standard deviations on 14 October.
Investors‟ growing appetite for risk is highlighted by the rise in bond yields, which
are now 54 basis points above their recent low. While high yield credit spreads
are still rising, albeit at a slower pace, we are seeing contracting credit spreads
for AAA rated US corporates. Looking at currencies, the waning strength in the
USD and Yen also shows that investors are taking on more risk.
Turning to the equity market components in the risk indicator, the fall in the VIX
since early October shows volatility is down, while there has also been a greater
preference for small over large caps, cyclicals over defensives and emerging
over developed market stocks. So far growth is still outperforming value, but this
is likely to reverse if the current „risk-on‟ rally is sustained.
The outlook for earnings revisions is also more positive over coming months.
EPS cuts are normal in September as US analysts prepare for Q3 results, but
October is less negative, while November tends to see positive revisions.
Risk aversion has fallen dramatically since a peak on 3rd October and
continued falls would be positive for risk assets, particularly equities
Highlights
Brad Zelnick has initiated on IBM with an Outperform as it‟s leveraged to
several macro trends driving growth in the technology industry.
Toby Williams has upgraded Fast Retailing (9983 JP) to Outperform due to
higher earnings estimates and recent share price weakness.
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