File Image
JOHANNESBURG - The risks of investing in stocks have not reached extreme levels as experienced during the dotcom bubble and the 2004-2007 bull market, but two very unique indicators of market risk indicate that investing in stocks in developed economies as well as in emerging markets are at or near the highest levels in 10 years.

The performance of global consumer staple stocks as measured by the MSCI Consumer Staples Index (US$) relative to equity markets in developed economies as measured by the MSCI World Index (US$) is an excellent indicator of the market risk as perceived by global investors in developed equity markets.


On the other hand, the ratio of the gold price (US$/oz) relative to the MSCI Emerging Market Index (US$) is an excellent indicator of the risk of investing in emerging market equities as perceived by global investors.

The relationship between the performance of global consumer staple companies to global equities and the ratio of the gold price (US$/oz) relative to the MSCI Emerging Market Index (US$) is remarkable, if not astonishing. The main reason is that the high-risk assets are compared to low-risk assets.

It is evident that the global equity market risk as measured by the MSCI World Staples Index: MSCI World Index ratio is at the same level as in February 2011 before the sell-off of stocks due to the euro debt crisis. The ratio is also lower than the levels that preceded the sell-off on the back of the launch of the Conservative Party’s Manifesto in April 2014, which paved the way for Brexit.

Although it is approaching the lowest level since November 2008, the ratio is still significantly higher than the range during the 2004-2007 bull market.

A similar pattern is evident in the gold price: MSCI Emerging Market Index ratio. The only difference is that the ratio is now fast approaching the level reached at the time of the dreaded sell-off of global stocks in October 2008 when the global liquidity crisis deepened.

While the possibility of the ratios, and therefore extremely high risk levels, returning to the 2004-2007 bull market levels cannot be excluded, a consumer staples stock such as Coca-Cola’s performance relative to the S&P 500 Composite Index and the effectively full employment situation in the US suggest that the return to the 2004-2007 range is unlikely unless an unemployment level of 2percent to 3percent is the new normal of full employment in the US.

Where “risk-off” is a phenomenon where investors become jittery about economic conditions and switch risky assets such as stocks to low-risk investments such as cash, it seems that we are not there yet and probably in the “fade-risk” stage where stock market risk in general is reduced by taking action while still maintaining a relatively fully-invested position.


While global investors can fade their risk by overweighting global consumer staples stocks at the expense of global consumer discretionary stocks, the other important message is that investors and fund managers can fade the risk on their equity exposures in emerging markets by adding gold bullion to their portfolios at the expense of some of their exposure to emerging market equities.

That per se is likely to lead to downside pressure on emerging market currencies. In addition, with the US and, in fact, developed economies rapidly approaching the late cycle stage in the global economic expansion and the likelihood of interest rate hikes being brought forward, the carry trades whereby investors in developed markets sell First World currencies and invest the proceeds in high-yielding short-term interest-bearing instruments in emerging or developing countries may start to peter out. In turn, global investors’ appetite for emerging market bonds may start to wane as the prospects of capital losses due to weakening emerging market currencies increase.

My personal take on the “fade-risk” stage is therefore: begin to overweight global consumer staples stocks at the expense of global consumer discretionary stocks; add some gold bullion at the expense of emerging market equities; increase exposure to hard currencies at the expense of emerging market currencies; shorten the duration of government bonds in emerging markets; and be patient.

Ryk de Klerk is an independent analyst.

The views expressed here are not necessarily those of Independent Media.