Risk/return trade-off improves – Robert Ducker

There has been a clear shift in sentiment over the past few months as news flow has turned more positive. Going into 2023, investors feared that economic growth could slow significantly, but three main developments have led to a pick-up in risk sentiment in the opening month of the year. First is China’s rapid reopening, which surprised markets and has boosted its domestic growth outlook. We view this as a positive not only for China’s growth but also for its important trading partners (Europe). Secondly, warmer than expected weather in Europe has sharply reduced its recession risk. Finally, inflation in most developed economies has been falling, which could indicate that we have seen the worst in terms of tightening of monetary policy, reducing the risk of a hard landing. These developments led to a pickup in risk sentiment, as evidenced by Goldman Sachs’ Risk Appetite Indicator (RAI). After spending most of last year in negative territory, GS’s RAI has turned markedly to around 0.5 and Risk Appetite Momentum is at +0.3. Financial markets understandably reacted positively to these developments, but it seems investor focus remained fixed on central bank policy. We can summarise...