investment viewpoints

I can’t say I’m bullish

I can’t say I’m bullish
Florian Ielpo, PhD - Head of Macro, Multi Asset

Florian Ielpo, PhD

Head of Macro, Multi Asset
Sui Kai Wong - Portfolio Manager

Sui Kai Wong

Portfolio Manager

In the latest instalment of Simply put, where we make macro calls with a multi-asset perspective, we take a look at risk appetite measures and explain what they are telling us about the current investment environments.  


Need to know:

  • There are four different types of measures that can be used to gauge risk appetite in markets.
  • Price-based measures are delivering a quite bullish message at the moment, at a time when survey and exposures are still at low levels.
  • These split readings say a lot about investors’ uneasiness with respect to the current rally. This is all the more a reason to grow markets’ exposures in a cautious way.


Sentiment is an essential driving force of financial asset returns.1 Bull and bear phases are usually clearly identified and the entire investment community lives by the opposing images of a bull and bear taking over one after the other the price action of markets. If that notion is clearly imprinted on the mind of investors, measuring what gauges the passage of one regime to another – risk appetite – fails to find a consensus. There exist a variety of risk appetite measures, and our multi-asset investment process relies on such measures to navigate markets’ changing waters.

There are four main types of measures: market-based, risk-reward-based, survey-based and positioning-based measures. What is specific to the current period is how these measures are split between two clear camps: two categories giving bullish messages and two categories saying the exact opposite. In order to understand whether the current rally has legs or not, deciphering their confusing message has now become essential. Here is how we think we can read them.


Four shades of risk appetite measures

Since the publication of the seminal paper ‘What Does the Risk-Appetite Index Measure?’, there has been growing interest around the investors’ changing risk aversion. That risk aversion parameter has for a long time been the centrepiece of asset pricing literature, and its changing level has long been documented to be explain a large part of the variability of returns. When taking stock on the various risk appetite measures proposed either in the literature or by professional investors, they can be split into four categories that are found at the cross section of two dimensions:

  • Direct or estimated measures: such measures can be the outcome of a direct access to flow data or can require the usage of statistical models to measure markets bullishness.
  • Price-based or non-price-based measures: risk appetite measures can be the product of market prices such as volatilities or the level of correlations between assets or be the outcome of surveys conducted across a pool of investors.

Those four types of risk appetite measures can then be summarized as presented in the below table.


Figure 1. Classification of risk appetite measures






Risk/reward measures




Source: LOIM


Here is a brief explanation of what each of them are measuring:

  • Market-based: these measures are usually aggregates of volatilities, credit default swap (CDS) spreads and liquidity spreads. When all of these elements are low, markets are expected to be in a risk-on mood, and risk-off when they reach high percentiles.
  • Risk/reward measures: risk-on markets should see riskier investments being rewarded, when risk-off periods should see the exact opposite. Comparing the relationship between realized returns and realized volatility can help capture bull/bear phases. An indicator can be obtained from the percentiled beta of returns to risk (what we call our “CAPM” measure) or by slicing and dicing the regimes that drive returns on indices from the perspective of a Markov Switching model(what we call our “Markov Switching” measure).
  • Positioning-based measures: when having a direct access to investment flows, one can also calculate aggregated risk appetite measures. Flow of funds are one regular part of brokers’ publication which attract a lot of investors’ attention. A more hybrid way to tap into that information source is to run dynamic regressions of the performance of groups of investors on asset returns – like the beta of global macro hedge funds to the MSCI world.
  • Survey-based measures: journals and market-makers regularly produce surveys assessing the current preferences of investors. These can be regularly published surveys such as the American Association of Individual Investors (AAII) survey or infrequent.

Each of these measure present pros and cons, and the investors focused on avoiding investment biases (such as us) will have a natural interest to blend several of them into an aggregated index – we think diversification should be applied to portfolio construction as much as investment-driving indicators.


Deciphering the current lack of consensus

Figure 2 presents the recent evolution of these four types of risk appetite measures: our market-based, regime switching and CAPM measures, alongside the recent evolution of hedge fund beta to equities and the AAII survey. The pattern is remarkably striking. Price-based measures show a display of bullishness while the other two measures are still in quite bearish territories. A simple way to summarise this situation is the following: there is currently a bullish mood across markets that does not yet show in investors’ willingness to position themselves for it. That situation is perfectly understandable: if you take a look at our growth nowcasting indicator below, it clearly highlights how global growth is increasingly giving recessionary signs. In the meantime, as explained in the previous edition of this publication, the decline of inflation has led to a certain sentiment of relief across investors.  Investors are currently having a hard time balancing both forces, and inflation is tepidly taking the lead.


Figure 2. Risk appetite measures

Multi-Asset-simply-put-Risk appetite measures-01.svg

Source: LOIM, Bloomberg.


Between price-based and non-price-based measures, which of the two should we trust? At the moment, our eyes are on two key metrics:

  • In the market-based index, more than 70% of its components are improving: not only is this risk-appetite indicator high in terms of percentile, but this improvement is driven by a large majority of its components.
  • Across the three components of our global risk appetite indicator, the three of them (market and behavioral indicators) are currently higher than 80%, a remarkable agreement across of them.

The pace at which markets are recovering shows basically that this rally is happening in a limited liquidity context and leaves a large part of the investment community unconvinced. At the moment, we persist in seeing in this obvious sentiment recovery a fragile reason to add equities. Our own positioning is consistent with the combination of the price and non-price based measures; split between relief and the perspective of deteriorating macro conditions in the coming months. We can’t say we are bullish but can’t say we are bearish anymore either.



  Simply put, various measures of market sentiment are currently sending a confusing message which shows a level of uneasiness among investors vis-à-vis the current rally.  



[1] Read notably Macro Factor Model: Application to Liquid Private Portfolios, Scott Gladstone, Ananth Madhavan, Anita Rana and Andrew Ang, The Journal of Portfolio Management Investment Models 2021.

[2] As proposed in Gatumel and Ielpo (2013).

Macro/Nowcasting Corner

The most recent evolution of our proprietary nowcasting indicators for world growth, world inflation surprises and world monetary policy surprises are designed to keep track of the latest macro drivers making markets tick. 

Our nowcasting indicators currently point to:

  • Our nowcasting growth indicator remains in recession territory for the time being. This week the indicator remained stable. Of the Chinese data, 60% are improving: an encouraging first sign.
  • Our inflation nowcasting indicator declined again as Chinese and European indicators fell.
  • Our monetary policy nowcasting indicator remains between 45% and 55%. It has fallen marginally this week, mainly as the European indicator puts the ECB in a moderation phase.

World Growth Nowcaster: Long-Term (left) and Recent Evolution (right)

Multi-Asset-simply-put-Growth nowcaster-24 Jan-01.svg

World Inflation Nowcaster: Long-Term (left) and Recent Evolution (right)

Multi-Asset-simply-put-Inflation nowcaster-24 Jan-01.svg

World Monetary Policy Nowcaster: Long-Term (left) and Recent Evolution (right)

 Multi-Asset-simply-put-Monetary Policy nowcaster-24 Jan-01.svg

Reading note: LOIM’s nowcasting indicator gather economic indicators in a point-in-time manner in order to measure the likelihood of a given macro risk – growth, inflation surprises and monetary policy surprises. The Nowcaster varies between 0% (low growth, low inflation surprises and dovish monetary policy) and 100% (the high growth, high inflation surprises and hawkish monetary policy).


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