Abet Chichi2

[Chris McConnel]

Capital Market Stocks Are Reassessing The Risks





Solid quarterly profit results from the major brokerage houses in the past few weeks failed to spark a positive reaction in their share prices. This tepid response suggests that the focus has shifted to the potential negative implications of a rise in investor risk aversion. A de-rating in risk appetites has been gradually unfolding throughout the world, with emerging market stocks correcting and sovereign bond spreads flaring out. The latter is of particular note, as an initial widening in sovereign spreads in early-2004 pre-warned of a change in the risk landscape in the coming six months. A replay may already be underway with the Fed tightening cycle on the verge of entering a more aggressive phase and Treasury yields grinding higher as the U.S. inflation scare builds momentum. The downside is that both M&A activity and new issuance are likely to hit a soft spot as risk appetites are toned down, undermining profits for capital market firms. We continue to recommend below benchmark weightings in the S&P capital market index until the storm clouds clear out.


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