SG Market Risk Outlook - In Balance


Risk assets continue to be on a roll this year, buoyed by US monetary policy doing an about face and extreme accommodation of central bank policy globally. Importantly, earlier this year we pointed out that pessimism might be overdone, with the stock of negative-yielding assets falling 23.9% since August from roughly $17tn, the highest ever level. Equity markets have continued to outperform, with the S&P 500 and the MSCI Emerging outperforming all risk assets, and VIX levels remaining rather subdued (although the volatility landscape might be changing: see Vol Themes). Oil’s positive year should be interpreted with caution – prices in January were very low, so the base effect is strong.

Our analysis shows that the level of upside and downside risks across asset classes has increased since our last SG Market Risk Outlook. This means that the level of conviction in our base case outlooks has dropped since our previous publications in July and April this year. Conviction levels across all asset classes have declined to an average of 56%, down from 59% in July and 63% in April. As a reminder, we characterise upside and downside risks in price terms (rather than yield for fixed income), as the strategies are evaluated in the context of an investor holding long positions in each asset. However, when we evaluate upside and downside risks in terms of risk-on or risk-off, we must make some adjustments. For most assets, risk-on (off) is higher (lower) prices, with the notable exception of rates and credit, where risk-on, for example, means higher yields and lower prices, and gold, where risk-on means lower prices.

In short, after making the necessary adjustments for evaluating risk-on or risk-off, we find that, at this juncture, risks are precisely balanced (in balance) to the upside and downside. With the level of conviction at 56%, our analysts see a 22% probability of upside (risk-on) risk and a 22% probability of downside (risk-off) risk. This compares with a respective 20% and 21% in July, and 20% and 17% last April. In the space of three months, the level of conviction in the base case has dropped and risks are now balanced. This is the lowest level of conviction we have reported since publishing the SG Market Risk Outlook and the first time the risks are in balance.

The report further develops:
- Economic risks
- Global asset allocation 
- Asset class risks (equities, rates, credit, FX and commodities)

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Societe Generale Cross-Asset Research is composed of more than 200 Analysts, Strategists, Economists and Quant, combining their expertise into ‘Research-based’ and innovative solutions suited to client’ needs: fundamental studies and expert views, investment ideas and long-term strategies, trade ideas and tactical baskets, thematic and systematic indices, quant solutions. On top of its established UK and Western European base, Societe Generale Cross-Asset Research benefits from a global coverage thanks to its presence in the US and in Asia (Hong Kong, Singapore, Tokyo and Bangalore) and Societe Generale local networks in Eastern Europe.

This editorial contains financial analysis which reflects the opinion of the Cross-Asset Research department of Societe Generale at the date of its publication. It does not necessarily reflect the views of the other departments of Societe Generale nor the official opinion of Societe Generale. This interview is dedicated to institutional and professional investors and is not deemed to be seen and used by retail investors for investment purpose. The viewers shall consult their own financial advisers to make their own appraisal.