Thursday 16 August 2007
Fear and greed
In one of my last notes for Dresdner Kleinwort I stated that perhaps I had lost the plot. When I looked at markets all I could see was irrational complacency, the pricing of assets without any regard to risk, and the dash to trash.
Emerging markets were trading at the same valuation multiple as developed markets. Small caps were on a premium to large caps (ie a negative liquidity premium), and junk equity was the flavour of the day.
Given the unwind we have witnessed in the markets, it is fair to ask how far along are we in the process of risk re-pricing?
The chart above shows my fear and greed index. A simple construct that measures the risk adjusted relative performance of global equities vs global bonds. Whilst it has fallen sharply, it remains a long way from the kinds of panic sentiment that usually characterize buying opportunities.