Shyamal Banerjee/Mint

Shyamal Banerjee/Mint

Ourview | In the zone of risk once again

Ourview | In the zone of risk once again

The stock markets have been very volatile and have yo-yoed between “risk off" and “risk on" modes. As the hopes of a steady recovery from the financial crisis have evaporated, the markets have become increasingly nervous. One measure of that nervousness is the record low yield on US government treasuries. Another one is the sharp rise in the price of gold. Yet, at the same time, there is no dearth of global liquidity and whenever there’s a glimmer of optimism, money flows back into stocks, leading to a temporary rally before the nerves return and profits are swiftly booked. The Indian market, too, has been affected by the volatility, although investors have consoled themselves that in the long term it will do well.

Shyamal Banerjee/Mint

Andrew Haldane, executive director at the Bank of England, has said that apart from fundamental economic factors, there’s also a psychological dimension to the fear in the markets. He points out that investors who had lived through the Great Depression bore the scars of that experience for a very long time, making them risk-averse. He says that since memories of the financial disaster—the subprime mortgage crisis and the Lehman collapse—are still fresh, that has led to an overestimation of the probability of a repeat disaster. Risk, in the current environment, is therefore, overpriced.

Haldane’s thesis finds an echo in the International Monetary Fund’s latest Global Financial Stability Report. The report says that investors have become far more risk-conscious after the crisis. They have become much more discriminating in their attitude to sovereign risk, especially in the euro area.

But while it is true that there’s a psychological dimension to the current bout of risk aversion, the fact remains that the fears, while they may be exaggerated, are based on economic reality. The time for talking has passed and investors want to see concrete action by governments before they gain confidence in the markets once again.

Is lack of faith in governments holding back investors? Tell us at views@livemint.com

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