The Wrong Sort of Re-Risking?

Investors have been adding to their risk profiles, but markets have been “dialling up” some of their own.

(March 1, 2013) -- Many investors began piling back on the risk at the start of the year, but recent political and economic fumbles should make them draw a breath and consider the consequences, one of JP Morgan's top investors has warned.

Last week's downgrade of the UK economy and the inconclusive Italian elections did no favours to investors who have been filling up their risk buckets since the start of the year, Nick Gartside, international CIO for fixed income at JP Morgan Asset Management, has said in a note to the market.

"What we've seen over the last week has been the wrong sort of re-risking," said Gartside. "The UK downgrade and the Italian election results were helpful reminders that the road to economic recovery remains a protracted and painful one and that political risks in the Eurozone retain the capacity to surprise. Clearly, risk assets did not welcome these reminders, as government bonds took satisfaction."

Moody's downgraded the UK to AA last Friday, which saw the FTSE slump on Monday morning. Markets around Europe were more seriously hit by elections in Italy, which began on Tuesday and remain inconclusive.

All this has played out against a backdrop of poor European manufacturing data, concerns over the "sequester" in the United States, and noises from Japan about its central bank's moves to help support its still floundering economy.

"To investors with long memories, these moves are not unexpected but part of the risk on: risk off dynamic of the last few years," said Gartside.

He added that central banks' actions had helped stem the flow of crises last year, so markets could see further intervention.

"As the Italian saga unfolds further, and if markets continue to deteriorate, we could well see another iteration of the [Draghi] put. As ever, the real question is around the 'strike price' of the option. How bad do things really have to get? Or, is the European Central Bank reaction function now so well-known and the threat of action so well understood, that markets won't be tempted to find out?," he asked.

Legal and General Investment Management, one of the largest fund houses in the UK, said in an investment committee note yesterday: "Global risk assets have essentially moved sideways over the last month with Japan and the US outperforming emerging markets and the euro area. The committee generally viewed this as a period of consolidation rather than a topping process, but lacked the appetite to increase risk unless there was a correction."

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