Sign up to save your podcasts
Or
Share It's more risk on than recession
Share to email
Share to Facebook
Share to X
Share to email
Share to Facebook
Share to X
Or
It's more risk on than recession
What does the chart show?
This chart shows the Momentum Global Investment Management Risk Aversion Index over the past five years. The Index combines several different measures, such as global credit spreads, and forex and equity implied volatility to gauge what the current level of risk aversion is in markets. Risk aversion can be used as a measure of how tolerant investors are to taking on risk, given current and expected economic and financial conditions. During the early stages of the COVID-19 pandemic, risk aversion levels rose significantly. Since then, the Index has fluctuated as fiscal and monetary support provided stability throughout the pandemic before rising inflation fears, followed by the war in Ukraine, saw risk levels rise in H2 2021 and remain high for most of 2022. Since then, the markets appetite for risk has improved to levels not seen since early 2021.
Why is this important?
Risk appetite affects all asset classes differently and understanding how assets react to different types of risk is an important skill for any investor to have. The most volatile assets are the most sensitive to changing risk appetite levels, with excess returns during periods of economic stability and security being matched by excess losses when conditions change for the worse. During the pandemic, the ultra-loose monetary policy that was implemented by central banks allowed for highly risky assets, such as non-profitable tech stocks and cryptocurrencies, to post extraordinary returns in a short period. For those expecting a recession in 2023 after a difficult 2022, the falling levels of risk aversion come as surprise. This highlights just how unpredictable many aspects of financial markets can be. However, rather than trying to predict levels of risk, investors can take steps to protect themselves against it. With a good understanding of how risk affects different securities, an investor can build a portfolio of assets with a diverse range of responses to changing economic conditions. With diversification comes protection and outperformance during periods of uncertainty and volatility.
View all episodes
By Mondial DubaiWhat does the chart show?
This chart shows the Momentum Global Investment Management Risk Aversion Index over the past five years. The Index combines several different measures, such as global credit spreads, and forex and equity implied volatility to gauge what the current level of risk aversion is in markets. Risk aversion can be used as a measure of how tolerant investors are to taking on risk, given current and expected economic and financial conditions. During the early stages of the COVID-19 pandemic, risk aversion levels rose significantly. Since then, the Index has fluctuated as fiscal and monetary support provided stability throughout the pandemic before rising inflation fears, followed by the war in Ukraine, saw risk levels rise in H2 2021 and remain high for most of 2022. Since then, the markets appetite for risk has improved to levels not seen since early 2021.
Why is this important?
Risk appetite affects all asset classes differently and understanding how assets react to different types of risk is an important skill for any investor to have. The most volatile assets are the most sensitive to changing risk appetite levels, with excess returns during periods of economic stability and security being matched by excess losses when conditions change for the worse. During the pandemic, the ultra-loose monetary policy that was implemented by central banks allowed for highly risky assets, such as non-profitable tech stocks and cryptocurrencies, to post extraordinary returns in a short period. For those expecting a recession in 2023 after a difficult 2022, the falling levels of risk aversion come as surprise. This highlights just how unpredictable many aspects of financial markets can be. However, rather than trying to predict levels of risk, investors can take steps to protect themselves against it. With a good understanding of how risk affects different securities, an investor can build a portfolio of assets with a diverse range of responses to changing economic conditions. With diversification comes protection and outperformance during periods of uncertainty and volatility.