Read Axioma’s informed perspectives on the status of different potential risk sources around the globe.
The Storm After the Storm?
Equity markets posted one of the best quarters in more than a decade, but most were not able to cross into black territory for the year. Volatility—of benchmarks, sectors, risk model factors, etc.—came down from the year-to-date peaks, though remained high. Style factors saw an unusual performance, increased volatility, and large changes in factor correlations, which likely had a significant impact on active risk.
The Corona Quarter
The first quarter of 2020 came in roaring like a lion and went out like a (slaughtered) lamb. After stock indices were pushing new records in the first half of the quarter, the bloodbath in equities that followed not only ended the longest-running bull market in the US history , but also threw indices worldwide into a bear market. Volatility skyrocketed with major benchmarks seeing their risk increase two- to six-fold, with all components of risk contributing to the climb.
Markets celebrating! But Factor Investors?
Not So Much…
2019 was a remarkable year, with benchmarks around the world climbing to new records, while volatility plunged. Both emerging and developed markets shared in the overperformance, with all components of risk falling for both markets. However, style factors saw mixed results, with few reporting outsized returns for the quarter or year.
Market risk changed little...
But a lot happened under the hood
Markets around the globe wavered over the past three months, but the decade-long global bull market endured in the third quarter. Despite the market’s gyrations, risk was little changed, with most major indices seeing only a relatively small rise in risk from the end of the second quarter to the end of the third quarter. Nonetheless, a lot has happened beneath the surface.
A Strong Market ... but on Thinning Ice?
With the US remaining riskier than most benchmarks
While equity markets were strong overall in Q2—and risk levels did not stand out—some trends were troubling and investors should be cognizant of them. This report contains a detailed analysis of what happened to top-line risk and its drivers across the globe in the quarter, as well as a detailed analysis of style factor performance. We take particular note of the unusually poor performance of a number of style factors on which many investors bet, continuing the trend of the last few quarters. It has been our experience, albeit difficult to prove statistically, that unusually anomalous factor performance may be a harbinger of a change in the market’s direction.
Risk Retreats Around the Globe
Though US remains riskier than most benchmarks.
Stocks rallied around the globe in the first quarter of 2019, with most indices nearly recouping the steep losses of the previous quarter. Stocks rose as major central banks kept interest rates unchanged, allaying investor concerns of a global economic slowdown. With most US economic indicators on the positive side, some US indices recorded the biggest quarterly gains since the global financial crisis, while others approached record highs.
The turnaround corresponded to a sharp decline in risk. China was the only exception, with its risk at quarter-end higher than where it started. Even the UK market saw its risk fall, despite Brexit-related tumult. That said, the US remained at the top of the risk list, an atypical position it occupied in Q4 2018.
Risk Finally Rears Its Ugly Head
And takes a bite out of 2018
Year-end 2018 was the antithesis of the close-out in 2017. While investors reveled in large equity gains and low volatility the year before, 2018 brought the misery of steep losses and high levels of volatility. Markets were choppy throughout the year and especially in the fourth quarter, with stocks wavering between gains and losses. Major indices around the globe fell abruptly from the record levels reached in January, ending the year under water. The corresponding increase in volatility of indexes, countries, style factors, etc. suggest that managers of all stripes may want to reevaluate their portfolios to reflect the changed environment.
Top-Line Risk Drop in Q3 Masks Underlying Turmoil
Q3 2018 saw large divergences between indexes typically viewed as “risk on”-type assets and their presumably less-risky counterparts. Top-line risk was down led by the fall in market risk, but other sources—many of which are the things managers tilt on and that drive active risk—actually bucked the market trend and increased.
Risk Retreated in Q2 But...
Active Managers Need to Look Under the Hood
Markets worldwide saw large swings in Q2 2018, and while US stocks were up for the quarter, many world markets were barely in the black. Volatility remained elevated from historical lows, but has eased globally, driven by the fall in market risk. Other components of risk, however, rose in Q2 which may have an important impact on active managers.
Farewell Low Volatility…
Are we now closer to a trough or a peak?
After falling to historically low levels at the end of 2017 volatility surged in the first quarter, driven mainly, but not exclusively by market risk. Against this backdrop, interestingly, style factors remained quite well-behaved.