\nAugust 2014 to June 2016, the RPI averaged 69% (vs. 82% between July 2007 and March 2009), as highlighted by the chart below.<\/li>\n
\nbiggest rise on record, soaring by 30pp from 40% to 70%.<\/li>\n<\/ul>\n
As it turns out, the RPI\u2019s sharp decline in July confirmed the downtrend observed since the start of the year for four of the five index components,
\nabstraction made on the Brexit shock at the end of June.<\/p>\n
Looking at the detail, the main contributors to the RPI\u2019s decline are: (1) the decline in equity volatility (average 1-month implied volatility for the S&P and
\nEuroStoxx); and (2) the tightening of emerging spreads in US dollar (EMBI+ Composite) and of US corporate high yield spreads (H0A0), reflecting the
\nextent to which investors are reaching out for yield and the rebound in crude oil prices. The FX volatility component (1-month implied volatility) has
\ncharted a more erratic course over the year, reflecting uncertainties pre-Brexit, notably as regards the cable. All in all, these four components (volatilities
\nand spreads) are now close to zero. The one \u201cstubborn\u201d component is the correlation between bonds and equities (measured by reference to the US
\nmarket, as the correlation between the US 10-year TNote and a global equity index), which remains positive, pegged at a high level.<\/p>\n
Is the RPI\u2019s decline reason enough to re-channel investments into risky assets?<\/p>\n The chart overleaf displays Sharpe ratios for the main asset classes in light of the different risk regimes. Unsurprisingly, there are very pronounced There remains that the RPI is a coincidental risk indicator, not a forward looking risk indicator.<\/strong> Past experience shows that a low RPI does not Bearing in mind also the currently very aggressive equity positioning of hedge funds and given that the risk concentration index has held on high in![\"natixis_risk_perception_index_rpi_.jpg\"](\"http:\/\/www.next-finance.net\/http:\/\/beta.next-finance.net\/wp-content\/uploads\/2016\/08\/natixis_risk_perception_index_rpi_.jpg\")
<\/a><\/p>\n
\ndifferences depending on the risk regime. When risk perception is low (i.e. when the RPI is less than 25%), as is the case right now, the best
\nperforming assets classes are equities, high yield, emerging assets and industrial metals. When risk perception is high (i.e. RPI exceeds 75%), govies
\nand precious metals are the best performing asset classes. In between, asset classes achieved more or less the same Sharpe ratios.<\/p>\n<\/a><\/p>\n
\nnecessarily point to strong risk aversion shocks (see chart below). At the same time, the very low level of the RPI does not appear sustainable over the
\nmedium term given the many uncertainties that await after the summer break, notably an expected re-pricing of the Federal Reserve\u2019s monetary
\ntightening (our expectations being for a hike in the Fed Funds rate in December) along with a resurgence of the political risk in Europe (Italian
\nreferendum) and in the US (presidential election).<\/p>\n
\nrecent weeks (see below), our view is that the recent decline in the risk perception index should be interpreted with caution, not with complacency.<\/p>\n