Risk Turns Upward after Five Consecutive Quarterly Declines

London - 22 July 2013

Risk reversed course in the second quarter of 2013, turning upward after five consecutive quarters of declining volatility, according to Axioma Insight: Quarterly Risk Review, a report on the state of risk in publicly traded equity markets around the globe.

Reasons for the across-the-board uptick were in ample supply, though the increase was lower than what might have been expected, given the number of issues with which the markets were contending.

“With the Fed talking about an end to quantitative easing, a slowing of growth in China, and Japan’s central bank second-guessing its own stimulus plan, the second quarter gave investors plenty to fret about,” said Melissa Brown, CFA, Senior Director, Applied Research and co-author of the report. “The result was that most markets retreated in the period, as investors justifiably felt somewhat whipsawed, though the impact on risk largely occurred toward the end of the quarter.”

The impact of the concerns was reflected most strongly in China and Japan, though the rest of Asia also reacted negatively, pointing to a possible shift in the focus of economic worries from Europe—which dominated headlines a year ago—to Asia.

Ironically, reaction to the comments from the US Federal Reserve was stronger in Asia than it was in the US, though uncertainty regarding US market intervention led to an increase in volatility and asset-asset correlations in both US and Asian markets, which then spread to other markets around the world.

Late June saw a sharp increase in volatility in Chinese equity markets, as a steep rise in interbank lending rates followed Chinese government efforts to clamp down on that country’s shadow banking system, which has allowed excessive credit growth outside of the regulated lending markets.

The latest quarterly results contrasted with those of the first quarter, when investors largely ignored macro concerns, including the threat of US sequestration, panic in Cyprus and weak job growth.

The good news behind Axioma’s second-quarter report was that volatility remained nowhere near the peaks of 2008 or 2011. “Risk in most markets is still fairly low, relatively speaking,” said Brown. “In fact, excluding Japan, China and Asia ex-Japan, both medium- and short-term risk were actually down several points from year-ago levels, for the benchmarks we track.”

“By the same token, the second-quarter upturn in risk is not to be ignored,” said Brown. “We cannot help but feel a bit uneasy, and will be listening closely for the sound of sputtering economic engines on the road ahead.”

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.

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