Bloomberg/London

Smart money investors are dipping their toes back into bullish trades on Europe - a signal that the appetite for risk is recovering, says Stanislas Bourgois of Credit Suisse Group.
A flurry of concerns surrounding a slowdown in China and the next move from the Federal Reserve wiped almost $13tn from global stocks over the summer months. Yet Europe’s stock prices reflect a more dismal growth outlook than is warranted - the recovery is still on track and profit growth will reach “high single digits” both this year and next, Bourgois says.
“This was maybe an opportunity to reset some risk trades,” said Bourgois, head of equity derivatives strategy at Credit Suisse, adding that in the last week, funds have resumed bets that euro-area equities will outperform US peers. “If you missed the opportunity to be long back in January, maybe now is the chance.”
Some signs to Bourgois that traders are creeping back into riskier trades: a pickup in options that bet the Euro Stoxx 50 will outperform US stocks, and an increase in bullish wagers on European dividends.
European equity funds have lured money in 16 out of last 17 weeks and saw money coming in even as US and emerging-market funds saw outflows, according to a Bank of America Corp report, which cited EPFR Global data.
Some aren’t so optimistic.
Citigroup wrote in a report this week the odds of a global recession in the next couple of years are 55%. Unlike the US-driven slumps of the last two decades, this one will be generated by sliding demand from emerging markets, especially China, according to the bank.
Adding to concerns is that traders in quantitative strategies are making things worse. In a much talked about report last week, JPMorgan Chase & Co’s Marko Kolanovic wrote that buyers or sellers who base investments on algorithms exacerbated the rout in equities last month, and will continue to fuel volatility.
While the correction in equities was magnified by funds that employ risk parity strategies, they weren’t the chief cause, according to Bourgois. Those funds’ strategies contributed to about 7% of the declines, he estimated. The bigger culprits: a seasonal decline in risk appetite and the fallout from the oil rout, he said.
“You have the willingness to get out of risky trades and you have the mechanics of exiting risky trades,” Bourgois said. “As soon as the market falls, you start getting stop losses and these trades get unwound, which is why you have this coordinated move out of popular trades.”