Investor appetite for risk continued to increase in the last quarter, according to the findings of the latest Risk Rotation Index by NN Investment Partners, formerly ING Investment Management.* Overall, 29.6% of the panel of institutional international fund managers surveyed stated that their risk appetite had increased over the previous six months, compared to 16.5% who said that it had decreased.
This means overall net risk appetite has increased by 13.1% in the last quarter and builds on an increase of 8.5% recorded in January 2015, making this the second successive quarter that investor risk appetite has grown following a marginal decline in risk appetite (-0.6%) in October 2014.
Valentijn van Nieuwenhuijzen, Head of Strategy, Multi-Asset at NN Investment Partners, says: “Following a slight decrease in risk appetite at the end of last year, it appears investors are beginning to see the current environment outlook as more ‘risk friendly’ so we expect to see more confident investment approaches in the coming months. While there remain some potential threats to returns it looks as though investors are starting to view these as opportunities rather than obstructions to portfolio returns.”
When asked about potential threats to their investment portfolios, investors still see a potential Eurozone crisis as the most likely scenario, with 35% of respondents citing this threat as ‘significant’. However, this also indicates that fears of a crisis hitting Europe have eased somewhat since Q1 2015, when 46% of respondents felt that it posed a significant threat to their portfolio.
The threat of a potential Eurozone crisis also explains the fact that Euro Peripheral Bonds – one of the biggest portfolio overweights in recent years, were viewed as favourable by just 4% of respondents when asked about their favoured Fixed Income sectors.
Other potential dangers such as a black swan event (28%) and a Chinese slowdown (25%) were also named by investors as events that they were wary of. However, a rate increase by the Federal Reserve was only cited as a threat by one in six (16%) respondents indicating that this was not a major concern, despite suggestions the Fed may seek to start normalising the rate as early as June 2015.
One reason behind this increase in risk appetite could be the fact that inflation fears in the major economies is currently low, with the majority of investors not expecting inflation risk to exceed 3% over the coming years. Only one in ten (10%) expected it to exceed 3% in the Eurozone, followed by the US
(8%) and the UK (7%). 14% expected inflation risk of above 3% in Japan, although this was tempered by the fact that 30% of investors believed it would be below 0%.
Van Nieuwenhuijzen continues: “Limited upside inflation risks remain a key characteristic of the current macro and market environment. This drives behaviour of global central banks and the investor’s hunger for yield. For as long as it coincides with a gradual recovery in the global economy it provides a constructive underpinning for global markets, especially outside of government bond space where additional potential upside has now become very small.”
When looking at the most attractive geographical regions in terms of risk versus return, Emerging Markets took over from the US as the most favourable region, with 69% of investors selecting it as favourable. This was followed by the US (66%), the UK (65%) and the Eurozone (62%). Japan (44%) and China (38%) were viewed as the least attractive regions for risk relative to return.