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Infographic: Market Risk Insights, Q3 2018

Journeying through a

changing risk environment            Q3 2018

Risk is amorphous, creating investment opportunities and threats to capital at each stage of the cycle.

In response, investors must watch for familiar patterns and new disruptions amid streams of financial indicators.

Models based on statistical history can serve as useful, if inexact, guides to the future. But we need to use all the tools at hand, going beyond number crunching to consider geopolitical tensions and sustainability concerns, to separate meaningful signals from the noise.

We recommend tracking the following six indicators to recognise risk in its current form – and identify where opportunities lie.

In conclusion

US author John Steinbeck championed the ability of individuals to adapt to new environments: “As an opal changes its colour and its fire to match the nature of a day, so do I,” the Nobel prize winning author wrote.

Investors should be similarly adaptive. Volatility may have declined in Q2 after a jumpy start to the year, but our forward-looking indicators suggest that markets are tiring at the end of a long cycle: US equity valuations are stretched relative to history and asset-class correlations are primed for decoupling.

Markets are vulnerable to shocks, and investors should be ready for new colours and fire.

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