The global economy and financial markets in 2007: When will risk appetite reverse?

Wed Apr 4, 2007

Gavyn Davies, chairman, Fulcrum Asset Management and founding partner, Prisma Capital Partners

In 2006, a single common factor, global risk appetite, tended to dominate the pattern of returns on virtually all asset classes throughout the year. When global risk appetite was rising, as it was for most of the year, equities outperformed bonds, and the higher risk parts of both the equity and bond markets outperformed safer assets. This factor also dominated the pattern of hedge fund returns.

There are basically two explanations for the rise in risk appetite which has gripped the world markets since 2003 - one benign, the other less so. The benign explanation is that the decline in risk premia has followed naturally from the decline in market volatility, which in turn has been caused by the strong and stable performance of the global economy over that period.

Not only have we seen global real GDP rising...

ISSN: 2151-1845 / CDC10004H

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