Gauging Risk

Gauging Risk

June 12, 2019 Off By Chuck

I find it helpful to regularly assess global investors willingness to take on risk (it’s a kind of “follow the money” check). Why?  When the there is little perceived risk by investors, markets tend to trend higher and this is reflected when you see the riskiest investments outperforming. Of course, when risk is increasing the first things that get sold are those assets with the greatest risk. As such, investing in these instruments can be a blessing and a curse. In the world of bonds, the riskiest investment is considered to be junk or high-yield fixed income securities. For stocks you would need to look no further than the frontier markets due to their extreme illiquidity. Closely monitoring those investments to access risk in the two major asset classes can act as an early warning of potential future trouble …. a proverbial “canary in the coal mine”.

For those that don’t know, frontier markets have been defined as a developing country which is more developed than the least developed countries, but too small, risky, or illiquid to be generally considered an emerging market. Not perfectly clear or well defined as you will find situations where there is no agreement about which category a specific country fits in to. But it does provide a weak framework and definition but leaves it open to individual interpretation. There are a few ETF’s that invest solely in these markets, my preferred proxy, the biggest and most liquid is FM.

Looking at the current chart of FM, you can see it declined for the majority of 2018, losing more than 25% and like the rest of global stocks, found a bottom on Christmas eve.  Since that time, they rose for 7 weeks, climbing more 13%, consolidated for 13 weeks and eventually busted a move higher. As you can see, that consolidation created a bull flag pattern which points to a target just below Jan 2018’s highs. This tells me that, at least for now, global risk (and most importantly the desire for equities) is still on and we have not yet topped out.

I would be remiss if i didn’t point out the very strong similarities the current price path is following as compared to the one that began in July 2014. While the markets don’t necessarily repeat, they do rhyme.