Gavekal Capital: Risk is On as France Gets Downgraded

Friday, November 8, 2013

Risk is On as France Gets Downgraded

We find it interesting that on a day when the French government gets its credit rating downgraded the spread between French OATs and US Treasury Bonds widens to the highest level since April 2010, with OATs now yielding 52bps less than USTs. This spread can be viewed as a measure of investor risk seeking behavior. Perhaps not surprisingly then, the OAT-Bond spread shares a pretty close relationship with the forward PE ratio of the S&P500, which two days ago hit its highest level since October 2009.

For some perspective, US real GDP growth hit 3.9% in 4Q09 with expectations for 3% growth in 2010. Today, the latest GDP print hit 2.8% (thanks to inventory accumulation) with expectations for 1.6% in 2014. In other words, investors are putting the same premium on stocks today as four years ago, but both realized and expected growth are well below the levels seen then.