Low Vol Regime In Perspective

Volatility is the most disturbing factor in financial markets and it’s something people should always keep an eye on. Measured by popular metrics like VIX or VSTOXX, it’s assimilated to the « fear indicator » of investors.

Looking at the long past of the US equity market (S&P 500 in chart below), you can see that volatility goes in regimes that can change widely but rely mainly on macro environment (expansion/recession) and it’s impact on the psychology of investor (P/E or valuation).

Volatility in equity market in perspective

Source: Goldman Sachs

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Risk Appetite Needs Growth – Goldman Sachs

Source: Goldman Sachs

Per today’s report:

« As equities rallied and bonds sold off, our measure of risk appetite reached a new post-crisis high, but it has started to retreat more recently. Near-term, we think growth optimism will persist and keep risk appetite strong. We are long US equity near-term as it should be a direct beneficiary of growth optimism, but expect optimism to moderate eventually. Later in 2017 we are looking to rotate from S&P 500 to EM (specifically EM-ex-China) where risk appetite has lagged and we expect the growth picture to be more supportive. We also like Europe and Japan on a 12-month horizon in our asset allocation. Both of these lagged global equities in 2016, but should continue to be beneficiaries of reflation and have supportive monetary policy backdrops. »

On a 12 month horizon, GS is overweight Equities, with a bias towards Europe and Japan, but underweight US equities and Neutral on Asia ex-Japan.

The bank underweights Government bonds and is Neutral on credit (yet with a preference for US High Yield and Euro High Yield).

It’s also Overweight Commodities and Cash.