Trends in Risk and Correlations Remained Subdued in the Second Quarter, Despite Increased Concerns Over Europe and Fear of Global Contagion

London - 24 July 2012

Axioma’s Quarterly Risk Review Points to a Decoupling of Spain and Greece

  • Markets globally were tough in the second quarter, with China as lone exception.
  • Risk looking at Greece, Spain, Italy, UK, Germany and Switzerland indicated a decoupling in Europe. Greece’s risk continued to climb substantially higher than most other countries, including Spain and Italy.
  • Short horizon risk forecasts rose in most regions during the quarter.
  • There appears to be a reduced likelihood of a ‘surprise’ in the coming months, as statistical factors did not seem to pick up anything that wasn’t reflected in fundamental models.
  • A potentially positive sign, correlations remained relatively subdued, indicating that stocks were likely more differentiated than they typically are during crises.

Despite challenging market conditions driven by renewed concerns over the fate of Europe, changes in risk were relatively subdued in the second quarter, as increased short-term risk was countered by a decrease in medium-term risk, according to the latest edition of Axioma’s Quarterly Risk Review, a comprehensive reference on the state of investment markets for portfolio managers, risk managers and other investment professionals.

“Risk estimates and correlations tend to spike in a major crisis, but that’s not what our data showed in the second quarter,” said Melissa Brown, Senior Director, Applied Research and co-author of the report. “Both risk and correlations remained well below their historical highs, underscoring the fact that investors are increasingly differentiating sources of risk—whether by country, currency, industry, etc.—compared with past crises."

A special Axioma study focusing on European risk revealed that the beleaguered economies of Greece and Spain were decoupling from the rest of Europe, in terms both predicted risk and correlations. Country risk now makes up a larger portion of total risk, as currency risk—specifically for the euro—declined in the second quarter.

“Correlations overall rose in the quarter, but ended the period nowhere near prior peaks, suggesting that investors are not in the midst of a one-theme market,” said Brown.

Commenting on trends in Europe, Brown said: “Risk forecasts for major European countries and the euro appear to be stable or declining. In contrast, higher and still-increasing levels of risk appear to be concentrated in Greece and Spain, along with lower correlations with other markets.”

Statistical risk factors did not seem to pick up anything that was not reflected in the fundamental models. “This could be a positive sign, indicating an absence of lurking risk and, hence, the reduced likelihood of a ‘surprise’ in the coming months,” said Brown.

Axioma’s Quarterly Risk Review is currently available in eight editions:
• 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.

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