Risk Appetite Returns: What It Means for the Market

In financial markets, risk appetite refers to an investor’s willingness to take on potential losses in pursuit of investment returns. A higher risk appetite means they are willing to accept more, or higher, potential losses with the chance of higher gains. It is crucial to understand this concept in order to make informed investment decisions that align with your risk tolerance and goals. With recent events including geopolitical instability and inflation concerns, risk appetite is at the forefront of our minds. As appetite increases, so too does exposure, and therefore the potential for added volatility and mispricing. What should institutional investors be doing to balance risk and opportunity in the coming months?

What is Driving this Change?

In our view, the resurgence in risk appetite has been driven by several factors:

• Monetary policy shifts: The European Central Bank (ECB) cut interest rates for the second time this year, and expectations of further cuts are growing. Both the BoE and the Fed have addressed using a more cautious, data-driven approach. As a result, the perceived cost of risk is lower, encouraging a shift toward riskier assets like equities and emerging markets.

• Economic indicators: The UK’s March CPI announced a surprising decrease in inflation to 2.6%. This, alongside dipping consumer prices in the US, further suggests that inflationary pressures are easing and gives investors the “green-light” to re-enter higher risk markets with greater confidence.

• Geopolitical developments: Over the past few weeks, there seems to have been progress in US-China trade relations and a, potentially temporary, pullback from aggressive tariff threats. In the near-term, this is enough to cool fears of a trade war and reduce downside risk, therefore increasing the appeal of under-owned or discounted asset classes.

Implications for Financial Markets

With recent events resulting in increased risk appetite from institutional traders, there has been a rotation away from safe-haven currencies, such as the Japanese Yen, and toward higher-yielding, risk-sensitive currencies.

In commodities, with gold often playing the role of a safe-haven asset, it serves a dual-purpose during times of uncertainty. Whilst it is traditionally used to protect purchasing power during periods of rising inflation, the value of gold is not directly tied to any single country or central bank, making it attractive to both those looking for protection, and those seeking signals about macro sentiment.

As institutional risk appetite grows, trading desks are increasingly focussed on accessing stable, responsive liquidity across both FX and commodity markets. Institutional traders should look for a liquidity provider prioritising speed of execution in fast-changing markets, with the ability to manage slippage, spread volatility, and overall risk exposure.

Strategic Considerations for Institutional Traders

As risk appetite returns, institutional traders must find the balance between disciplined execution and leveraging opportunities. When partnering with a liquidity provider, there are a few key considerations to take into account; the depth of their liquidity pool, their ability to deliver low-latency execution, their infrastructure, and confidence in responding to volatile market conditions.

Equally, the use of real-time risk analytics tools, such as iSAM Securities’ Radar, can significantly improve a trading desk’s ability to monitor aftermath, slippage and spread dynamics. These platforms provide the tools needed to respond to volatility quickly and efficiently, therefore optimising performance and profitability.
 

Schedule a demo for Radar to see how it could support your business.

* iSAM Securities (UK) Limited, iSAM Securities (HK) Limited and iSAM Securities (Global) Limited, iSAM Securities Limited and iSAM Securities (USA) Inc. are together “iSAM Securities”.