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12 March 2019


The strong rebound in global equity markets continued unabated in February, with the MSCI World index gaining over 11% in euro terms over the first two months of 2019.

Sentiment has fully recovered to levels of optimism last seen before the fourth quarter decline. Technical indicators are flashing ‘overbought’ signals, suggesting that a new correction phase is near. The strong rise in optimism has not been matched by improvements in fundamentals, with the global economy still showing signs of weakness, so that risk markets do indeed appear vulnerable.

The extent of such corrections remains to be seen, but considering whether investors are too optimistic it pays to watch what investors do, rather than what they say they do. Most investors have been selling equity funds and ETFs in recent months, and have also been paying hefty premiums for protection against volatility. As a result, the VIX index, showing the implied volatility in option premiums, has recently been rising relative to S&P500 realized volatility. This implies that investors are much more worried about the outlook for equity markets than their optimistic survey responses suggest. As a result, they should already be more bearishly positioned than surveys indicate. A new phase of corrections is likely shortterm, but the corrections could well be a lot smaller than most investors expect and, maybe, hope for.