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Back to all Axioma, Inc. announcements

Market Risk Trends Downward for the Fifth Consecutive Quarter

Axioma Report Points to “Whiffs of Change,” But Sees No Definitive Signs of Trouble Ahead

Risk declined in the first quarter of 2013, the fifth consecutive quarter in which overall risk levels trended downward, according to Axioma Insight: Quarterly Risk Review, a report on the state of risk in publicly traded equity markets around the globe.

“US sequestration, panic in Cyprus, weak job growth in Europe and the US—none of it had much impact on risk in the first quarter,” said Melissa Brown, CFA, Senior Director, Applied Research and co-author of the Quarterly Risk Review. “Once again, we detected no definitive undercurrents pointing to an imminent reversal of the current risk regime.”

Asset-asset correlations fell to five-plus year lows in most markets during the quarter, driving a continued decrease in top-line risk, according to the Axioma report.

“Not only were the assets within markets much more differentiated, but the markets themselves appeared to be slightly less correlated,” said Brown. “From a risk perspective, the current investment landscape is substantially different from the crisis-driven markets that resulted from the global and European financial crises. With markets no longer in lockstep, equity investment managers and asset owners should see increased investment opportunities for active returns.”

Added Brown: “We continue to believe that current risk levels, which are near historically low levels, remain sustainable for at least a while. Low volatility, coupled with a lack of good alternatives, can drive more investors into the equity markets, as we have already observed this year.”

Nevertheless, there were whiffs of change in the latest Axioma report. “Risk forecasts for China, Japan and Australia rose in the quarter, bucking the overall trend,” said Brown. “China's forecast risk now exceeds that of the Euro-Crisis countries, and FTSE Japan is now one of the riskiest benchmarks we cover.”

The report also noted that changes in the risk exposures of benchmark stocks, or in the composition of the benchmark itself—not changing factor volatility—drove risk changes in some markets; a distinct departure from recent quarters. And lower correlations were a bigger driver of declining risk than lower stock volatility, another shift in direction.

Axioma Insight: Quarterly Risk Review is based on an analysis of Axioma’s fundamental and statistical risk models covering global, regional and single-country equity markets. The eight editions of the report provide topline measures of risk for each market, as well as an analysis of the underlying components and drivers of risk in those markets. The reports cover:

  • Asia Pacific Ex-Japan
  • Australia
  • China
  • Japan
  • Emerging Markets
  • Europe
  • Global Developed
  • US

Axioma’s Quarterly Risk Review is published by Axioma, Inc., a leading provider of decision support, risk analysis and portfolio rebalancing and performance attribution tools. The report can be accessed on the Axioma Insight page of the company’s website.