Stock Pickers Beware, This Unwelcome Pattern is Driving Markets Again

HSBC risk-on-risk-off index spikes to highest level since 2010

by Ellie Ismailidou
Market Watch

Sorry stock pickers, but the herd-like trading pattern that dominated financial markets in the aftermath of the financial crisis appears to be back in force.

In a note earlier this week, HSBC’s multi-asset quant research team said the so-called risk-off-risk-on theme is, once again, the “single most important driver of asset markets.”

The theme describes a situation in which asset classes become increasingly correlated with each other and respond largely to broad shifts in investor appetite for risk. Ultimately, asset classes lose much of their individual character and, instead, split into two camps: they are either “risk-on”, namely risky assets, or “risk-off”, meaning havens. As the names imply, risk-on assets rally when investors are upbeat and fall when the mood turns sour. Risk-off assets do the opposite.

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