巴黎银行-新兴市场-投资策略-全球风险溢价模型触发增持看涨头寸-20190510-9页_568kb

Summary of BNPP-Global Risk Premium Model Triggers Overweight/Bullish Position

Core Content

This document from BNP Paribas (BNPP) outlines the update to their Global Risk Premium Model, which is used to assess the probability of a market correction. The model, known as the <BNPSGRP Index> on Bloomberg, is a systemic indicator that helps determine shifts in investor risk appetite. Based on the model's current readings, BNPP recommends increasing the allocation to risk assets, as the model signals a reversal in risk appetite.

Main Viewpoints

• Risk Appetite and Market Correction: BNPP is monitoring the <BNPSGRP Index> to evaluate the likelihood of a market correction. The model suggests that investor risk appetite is critically low, which may lead to an appreciation of risk assets.

• Strategic Positioning: The decision to scale back positions at the end of January 2019 and to enter the year fully invested was based on the model's signals. The current model reading indicates a favorable environment for increasing risk assets allocation.

• Model Limitations: The model is not intended for long-term structural calls, but rather for short-term market movements. It is not guaranteed to be accurate in all scenarios, as it may be influenced by extreme market conditions or idiosyncratic events.

• Asset Class Performance: The model has shown to be a decent contrarian indicator for SP500, Emerging Markets (EM) credit, and EM FX in most cases. However, there have been instances where the model's signals were incorrect due to strong market trends or other external factors.

Key Information

• Model Framework: The model quantifies risk appetite by analyzing the correlation between asset risk (variance) and excess returns. It uses Spearman rank correlation to avoid the limitations of Pearson correlation, which only measures linear relationships.

• Expected Return Formula: The expected return on an asset is approximated as:
  $$
  Y = \alpha + \theta (\sigma^2)
  $$
  Where:

  • $Y$ is the expected return
  • $\alpha$ represents systemic or global risk
  • $\theta$ is the level of risk appetite
  • $\sigma^2$ is the variance of the asset

• Model Interpretation: The model's current readings suggest that risk appetite is at a low level, and the potential for risk assets to appreciate is increasing. However, a deterioration in China-US trade negotiations could act as a caveat.

• Legal and Regulatory Notes:

  • This document is not investment research and is classified as non-independent research for the purpose of UK FCA rules.
  • It may contain "Research" under MiFID II unbundling rules and is intended for specific firms that have signed up to BNPP Global Markets Research packages or are out of scope of the unbundling rules.
  • The document is a marketing communication and is directed at Professional Clients and Eligible Counterparties under MiFID II.
  • It does not constitute a prospectus or public offering and should not be relied upon as an authoritative source of information.
  • The information is based on public sources and may not be independently verified by BNPP.

Annex: Risk Appetite vs. Risk

• Risk vs. Risk Appetite: The document distinguishes between risk (structural components) and risk appetite (investor sentiment). It emphasizes that shifts in risk appetite can lead to significant price swings, even when risk fundamentals remain constant.

• Model's Basis: The model is based on the relationship between asset risk and excess returns, using Spearman correlation to measure changes in risk appetite. The model is designed to capture time-varying changes in risk appetite, not general risk shifts.

Conclusion

BNPP's Global Risk Premium Model suggests that investor risk appetite is at a low level, and the market may be on the verge of a reversal, leading to an appreciation of risk assets. While the model is a useful tool for short-term market analysis, it is not without limitations and should be used in conjunction with other market insights. The model's effectiveness varies across asset classes, and there may be instances where it fails to predict market movements accurately.