OECD Report Sees "Extraordinary Risks" That Could Have "Potentially Big Effects"
In its report released today the Organization for Economic Cooperation and Development suggests slower global economic growth in the future as business investment is not accelerating and the consumer is reluctant to spend (something that we have been discussing in this blog on an ongoing basis):
more here:
However, buried in the heart of the report (p 37, 38) and what caught my eye are some "extraordinary risk factors that are not taken into account in the projections that could have potentially big effects"
Yikes!!
As Risk Managers then, we need to be especially attentive:
- Negative yields on Government bonds (or where they are not negative as in Canada or the US, the "term premium" or real return after inflation is taken into consideration, is negative).
- In the Euro Area and US, spreads between high yield and government bonds (difference between high risk and low risk yields) implies "sustained investor risk appetite". In other words investors are chasing returns and taking on greater risk than perhaps they should.
- Equity prices have reached record highs in many OECD countries. The "assessment of value is inherently challenging". Our on-going theme is that stocks are expensive.
"An abrupt and simultaneous resolution of these excesses could disrupt financial markets seriously and have
considerable negative implication for the real economy, if accompanied by large losses for investors,
reduced risk tolerance and higher uncertainty."
"These signs of excesses in financial markets, and hence risks of corrections, are particularly
uncomfortable as ongoing changes in the structure of financial markets could amplify shocks."
"Indeed, the
amplitude of price movements has recently increased in some markets . Higher volatility in
bond markets may reflect longer-term trends related to automation and prevalence of high-frequency
trading").
"Also, ongoing changes in bank regulation to reduce risk taking could discourage
banks from acting as market makers, increasing volatility . "
We continue to advise caution!
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