Risky business excites investors

The appetite for risk among investors has reawakened alongside the performance of riskier assets in the stock market ecosystem, according to deVere Group CEO, Nigel Green.

This comes in the wake of the latest U.S. Federal Reserve announcement that it was hiking interest rates by 75 basis points in the biggest jump since 1994.

Green said investors have reacted atypically and “shrugged off” any worries of market jitters in the wake of the rate rise “maybe because it was largely priced-in [or] maybe because the Fed Chair suggested rate rises may now slow”.

“It is part of a wider picture. Investors appear to have rediscovered their appetite for risk, with global stock markets and high yield corporate bonds both making steady gains over the month so far,” he said.

“Interestingly, it has been the riskier parts of the stock market universe that have performed best: global small cap stocks have outperformed global large cap stocks, while in the U.S the tech-heavy NASDAQ index has outperformed the broader based S&P500 index.

“The relatively defensive FTSE100 has made more modest gains but remains one of the few major stock market indices to record overall gains since January.”

Green noted that current investor behaviour can be attributed to several reasons, including the adequate performance of large companies, the belief that central banks will force inflation out of the system and the ‘there is no alternative’ (TINA) argument.

“The higher interest rates go in the near-term, the sooner they can come down and help facilitate a new economic cycle,” he said.

“Although central banks are raising interest rates aggressively, they remain negative in real terms.

“Equities have the advantage of being linked to the real economy, with many companies able to raise their selling prices with inflation and so offer investors a level of protection from inflation that cash and bonds can’t.

“Big tech in the U.S. is cash rich. Global energy and mining companies are enjoying windfall earnings. Rising interest rates help financials’ boost profits.

“Meanwhile, many companies have used the rock-bottom borrowing rates of recent years to re-finance their debt at much cheaper rates.”