On Friday, Standard & Poor’s stated that the continuing difficulties in the housing and subprime markets have shrunk the formerly voracious investor appetite for risk-taking. Wall Street is increasingly shunning deals involving innovation and subsequent increases in risk. The securitized mortgage market is experiencing the greatest investor pullback, but risk aversion is extending far beyond that. To counteract rising investor reluctance to sink money into risky business during the first half of August, central banks over the globe injected liquidity into their country’s financial markets.
Fixed-income investors have turned to safe havens of government securities, cash, and “guaranteed” low-yield financial instruments such as bank deposits, CDs, and plain-vanilla commercial paper in order to shelter themselves from the current climate of uncertainty. Investment in speculative bond offers has all but ceased for now.
Too much of an aversion to risk is not healthy the United States economy. New businesses, especially those in emerging industries such as green energy, depend on risk-takers to invest in them while they get themselves off the ground. Established companies such as Microsoft need investor capital to fund their expansion and growth.
Businesses and individuals also rely on lenders who are willing to risk their money. Like investors of late, lenders are now tightening their hold on their money.
Investors can turn huge profits from taking risks because riskier investments, by definition, have substantially bigger payoffs than more conservative investments; but the flip-side of the coin they are more likely to fail than conservative undertakings, and when they do the losses investors take can be painful-and if not well thought out beforehand, financially destructive.
People are risk-takers by nature, some more so than others. Gambling extends as far back in human history as salesmen and prostitution. However, everyone knows that gambling can become a destructive addiction when not kept under control, and can ruin an individual who doesn’t intimately understand the game one plays.
This kind of risk-taking is essentially what was happening on Wall Street with the appetite for subprime-backed securities up until the second half of this year.
“For at least two years, Standard & Poor’s Ratings Services has argued that investors were too complacent about risk. Now, they are overreacting in the opposite direction. How much and how far they’ll overreact remains to be seen. History suggests that the credit markets will normalize fairly quickly, but that could still be months away,” said David Wyss, managing director and chief economist at Standard & Poor’s.
“Up until a couple of months ago, companies were able to refinance with unfettered access to the capital markets. Now, all that has changed. Issuance in the U.S. has fallen off a cliff,” noted Diana Vazza, managing director and head of Global Fixed Income Research at Standard & Poor’s.
Standard & Poor’s (PR Newswire), “Article Explores Pullback in Investor Risk Appetite”