Risk is just around the corner:

You might recall that just four weeks ago in Hedge Clippings (22 February) we referred to the fact that volatility was at historically low levels, and that all too frequently this preceded market pullbacks. That article by our Research Manager Sean Webster ended with the advice: "Potential risk is always around the corner, or bubbling just beneath the surface. Ignore it at your peril."

If you needed further proof of this just ask Kevin Rudd, who until Wednesday seemed to be Australia's Prime Minister in waiting before one of his so called supporters, Simon Crean intervened, and Rudd's nemesis Julia Gillard put him on the spot. Again.

This week's political fun and games is local history now, but who would have predicted that Cyprus, a geographic and financial spec on the world map, would in just a few days take centre stage and throw risk back into the global investment equation?

Unlike Gillard's government it looks as if the Cypriot saga still has some way to run before the result is known. Meanwhile the reverberations of both Gillard, and Cyprus' banking crisis will probably continue for years to come.

The short term effect of Cyprus for Australian investors is probably a timely reminder that exuberant markets can readjust. Having said that, to date at least the damage is not too great and the hunt for yield will still continue. Investing in this environment remains testing for many fund managers, with only the best absolute return funds able to adjust effectively to both rising and falling markets.

Meanwhile something completely different for this week with this clip being submitted by one of our loyal readers. Something completely different - not the two Ronnies!

Meanwhile have a good week-end.

Regards,

Chris

CEO, AUSTRALIAN FUND MONITORS

Global Macro Survey Highlights:

• Investors are gradually extending risk, amidst an improved outlook for global markets, according to a survey of more than 350 global investors conducted by Barclays. 17% of investors said they were running greater than normal exposure to risk (vs. 10% in December) and 23% had light or very light positions, compared with 38% in December. US equity prospects are upbeat, supported by the perception that Fed policy will remain loose, and while risks from Europe preoccupy investors, most believe they will not lead to a global financial event.

• Market participants are significantly more constructive about the outlook for global equities. The majority of investors expect equities to offer the highest returns over the next quarter. This is the first time in two years that more than 50% of investors have favoured equities over other asset classes in the next quarter. Meanwhile, the fraction of respondents that favour commodities and high quality bonds over other asset classes fell further to 7% and 10%, respectively. Most investors also perceive equities to be the likely outperformer in emerging markets (EM) over the next three months.

• Equity investors seem to be more cautious after the strong rally in the major markets in Q1. As such, they are gradually paring back their near-term returns expectations. 52% of respondents expect returns of between -5% and 5% in the next three months (vs. 45% in December) and 37% expect returns between 5-10% (vs. 44% in December).  Most respondents continue to see the asset class as fairly priced. But the fraction that believe the asset class to be undervalued dropped from 39% in December to 28% in March.

• Investors are also cautious due to lingering macro risks, citing the euro area crisis and worsening growth prospects in the US and the euro area as major concerns. Close to 60% of respondents see the low volatility environment of the past several months as the calm before another storm. More than 40% of investors considered the euro area crisis to be the most important risk over the next 12 months and slower-than-expected growth in the US and Europe is seen as the biggest risk to equity markets.

Read the entire report here.

ATTACHED FILESBarclays Global Macro Survey Q1 2013 (pdf format)