Analysis: Maybe the biggest risk is it's all ok

Wed Jun 27, 2012 1:47am EDT
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By Mike Dolan

LONDON (Reuters) - Perhaps the biggest investor shock of the second half of 2012 would be if everything turns out OK and the world doesn't fall apart at the seams.

As stock and bond markets hit the half-way point in yet another year of bank stress, euro crisis and disappointing global growth, early-year optimism has dissipated just as it did last year and the year before that.

But this year the gloom is already pervasive. Europe's inability to draw a line under the euro bloc's debt crisis has been the chief frustration but there's also a weary suspicion the already five-year-old credit crisis may have ushered in a western economic funk that could last a decade.

Global growth and earnings forecasts have been slashed again; euro breakup scenarios are now commonplace in investment thinking, if not positioning; hard-landing fears for the giant emerging economies of China and India are rife and nerves abound about the impact of built-in U.S. budget tightening next year.

Few could accuse strategists and fund managers of being over-optimistic.

Punch-drunk from a credit crunch most didn't foresee, investors have now become obsessed with hedging against negative "tail risks" - or events of statistically low probability, but high impact.

But is the relentless pessimism already reflected in markets and are investor positions overly skewed to now negative real returns of cash and top-rated government debt?

"Bear in mind that tail risk is a two-way concept and we focus only on the negative at our peril," said JP Morgan Asset Management strategist David Shairp, flagging an increase in equity exposure relative to bonds in JPMAM's multi-asset funds and a shift to overweight European equity from underweight.   Continued...