Are we living in an unsustainable risk situation in the financial markets? While many gurus announce a strong drop mainly in the bond environment, taking advantage of an always volatile month of August due to lower liquidity, the US stock markets continue to record highs with revaluations in the year that generously exceed double digits.

Similar gains are recorded in Europe also at levels never seen before (as always, this is not the case for the Ibex 35). The market sees a sky overcast with indicators, which may convey concern about the risk of an upcoming correction, but which coincide with an excess of liquidity in investors’ pockets, lacking other alternatives that offer lower-risk profitability; a summer period, in which trading is drastically reduced,

A panorama that is mixed with favorable forecasts on the progress of the economies during this and next year, which are only eclipsed by the possible withdrawal of stimulus from central banks, more advanced in the United States, and by the evolution of the pandemic that threatens more contagious variants of the virus, such as the current Delta.

Javier Méndez Llera, secretary of the Spanish Institute of Financial Analysts (IEAF) considers that the risk is relatively high. “Of course, well above the average perceived risk from the end of last year to the first quarter of 2021.”

And he attributes this situation to the change in attitude of the Federal Reserve in June “that already generated a lot of noise in the markets that month; without even assuming the tapering tantrum of 2013 but warning” of what it can announce at the turn of the summer. However, the Fed has been committed to adjusting the stance of monetary policy if risks arise that could impede the achievement of the objectives and reiterates each time that the rise in inflation may be temporary.

The money, then, is pending what the central banks do. And not only in the environment of fixed income, but also of the Stock Exchanges that are compared and valued with it. From the Madrid Stock Exchange they explain that we are facing a new reality of interest rates that does not allow comparison with historical situations. Zero rates, negative nominal rates and, more recently with the rise in inflation, negative real rates in all developed markets.

“If we apply those rates directly the Stock Exchanges could be even higher. To value the Stock Exchanges right now they are using reasonable levels of interest rates without risk and also reasonable risk premiums”, they indicate from this square.

Now, IESE professor Pablo Fernández points out that, as interest rates on government bonds have fallen, many analysts and consultants in the US and Europe are using what are called normalized risk-free interest rates that it is a risk free rate. According to the teacher, this leads to assessment errors.

According to MSCI data, the PER (times that the price contains the profit) in the US Stock Market would be 29 times, compared to the 21 times the monthly average since 1990. Although, the current one is 27.1. In the case of Spain, the current PER of the Ibex would stand at 30.10 times compared to an average of 15.78 times –now it is at 18.65–.

This feeling of low risk in the markets reflected in a Vix volatility index that is having a very stable behavior, accumulating a fall of 35% compared to a year ago, logically stumbles on the day-to-day of the markets. But the positive evolution of corporate results for the first half supports the good momentum of the Stock Exchanges, with increases of 70% in the S&P 500 index from the lows of 2020. These are the main risk indicators:

Increase in coverage
The highs in bonds and the stock market, the scares coming from Asia, the uncertainty of Covid-19, are raising the levels of coverage in the portfolios to maximums. Ignacio Cantos, director of investments at atl Capital, explains that although “volatility is very low, investors have taken to maximums in the last month the purchase of put options (sale) in order to hedge their positions.

Macroyield, Antonio Zamora and Patricia García explain that the Skew index has reached all-time highs. This index measures the difference between the cost of derivatives that protect against large market drops, on the one hand, and the right to benefit from a rebound for the other. “Skew rises when fear outweighs greed,

Retail investors at highs
The latest data from the Fed show that the level of retail market participants is at an all-time high, with 29% of shares and 40% of financial assets (banks). Previous highs in household share were followed by low equity returns: 1969 (1970s inflation), 2000 (tech bubble), and 2007 (global financial crisis).

However, Ben Laidler, global markets strategist for the eToro platform, believes that now it is different because of the structural change of the online community, free trade, fractional ownership and more investment options. Also, the low yields on bonds and rates, and, finally, an excess of savings of 3.3 trillion and a household debt over GDP of 20 percentage points below 2008.

Rotation towards higher quality assets
A warning about the risk of the markets has materialized with a transfer of the investor towards higher quality stocks, which indicates that the upward process is ripe. Aneeka Gupta and Pierre Debru, analysis directors at WisdomTree, explain that this trend is accelerating and a good example is that in the second quarter of the year the quality factor (+ 10.88%) outperformed cyclical factors such as to that of value shares (3.4%) and small caps (5.4%). Something that has also happened in the Spanish Stock Exchange, whose profitability is led by the Ibex 35 (10%) compared to the Medium Cap (6.34%) and the Small Cap (3.93%).

Leverage with stocks
Debt by margin, known as the amount that people and institutions borrow against their holdings of shares, appears to have reached a peak last month, with data from the Financial Industry Regulatory Authority (FINRA) in the United States. When comparing the annual change in debt levels by margin with the S&P 500 index, it is observed that spikes in debt levels by margin have been an important precursor to the corrections of the US equity market, as seen in 2000 and 2008 during the dotcom bubble and the great financial crisis.

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