UBS’s equity strategy risk appetite indicator inched up this week for the fourth week in a row, rising to -1.5 from -1.7.
That’s out of the extremely risk-averse territory, which UBS defines as -3 and below. However, the figure is something of a contrarian indicator, as you can see from the chart below (-1.5 our highlight). When investors feel extremely risk averse (< -3) 12-month equity returns tend to be positive at about 10 per cent on average. When they feel extremely risk-happy (>1.3) the returns tend to be poor, at something like 1 per cent on average.
When the indicator is between -3 and -1.5 the returns also tend to be low or negative.
At -1.5 per cent then, the risk indicator is on the cusp of the turning point between historically negative and positive returns.
But, we would caution, it can easily move back down. The below chart, which shows the three components of the risk indicator, should highlight the opposing forces in the recent moves. The risk indicator for equities positioning has risen rather sharply, while credit and FX has stagnated. Only one of those is probably right. In short, investing in equities remains a risky business.
Related links:
Green shoots and escape chutes – FT Alphaville
Green shoots; severe frosts – FT Alphaville
BarCap – “The bear market is probably over” – FT Alphaville
Bear market not over – sell today – FT Alphaville