What will happen if investors become ”fearful”? - Natixis

Analysts at Natixis explored hat might happen if investors become ”fearful”?

Key Quotes:

• The equity market correction in early February 2018 has apparently made investors more “fearful”. What happens when investors are fearful?
• They hedge against the risk of a market decline (hence the rise of the VIX);
• They switch to risk-free bonds, which limits the rise in long-term interest rates on government bonds in the United States and in the core euro-zone countries;
• They underweight risky assets (equities, corporate bonds, commodities), resulting in lower prices of such assets for a long time;
• They move into safe haven assets such as gold, for which prices therefore rise.

Conclusion: A regime change in financial markets 

A new regime has therefore appeared in financial markets, and it will probably persist. The equity market correction in February 2018 probably ushered in a regime change in financial markets, where investors are fearful: they fear a decline in risky asset prices. We have seen that all the consequences of this regime (for volatility, risk-free interest rates, asset prices and safe haven assets) have been present since the equity market correction in early February 2018.