FYI | Jul 18 2008
By Chris Shaw
The past two days has seen a strong rally in US equities but as State Street Markets points out the investor approach at present remains a safety first one as the acceptable level of risk for most investors has moderated.
This sugggests professional investors are far more cautious than panic stricken at present, this despite commentary tending to suggest the current economic environment is likely to produce the worst economic slowdown since the Great Depression.
This cautious attitude of fund managers shows a difference between now and the past few months, as fund flows at present are into developed markets whereas in the first quarter of this year funds were flowing out of developed markets and into the developing markets, especially those in Latin America.
The group points out this flipping around in terms of the direction of fund flows is largely valuation based, as compared to historical levels developed markets are now relatively cheap while the developing markets remain expensive, even allowing for recent declines.
This makes the developed markets more of a safe haven as while inflation is high it is not yet out of control, so the European and UK markets in particular where interest rates have been increased or held steady are experiencing the highest levels of inflows.
At the same time the multiples investors are willing to pay for intangible assets, which the group suggests is a good measure of investor confidence levels, are approaching 20-year lows in developed markets. This highlights just how much risk aversion is the approach in all markets at present, especially by the professional fund managers.
State Street also suggests it shows the difference in perception of the economic outlook in both developed and developing markets as the current credit crisis is deflationary in nature, but it is the central banks in the developed markets that are seen as having the ability to dampen price rises whereas those in developing markets are not regarded as having the same power to keep prices under control.
According to the group’s analysis this implies investors are currently not as panicked as the headlines are suggesting, but the risk remains to the downside in its view as it will only take a further round of write-downs from banks or any serious deterioration in the macro-economic outlook for these investors to move to the next level, which it classes as “Riot Point”. In other words, the volatility in global markets is far from finished.
