Risk across global market benchmarks increased in Q4 2011, compared to the previous quarter, according to a risk review produced by Axioma, a provider of risk management tools for portfolio managers.
Global debt worries, including the recent downgrading of the US by credit ratings agency S&P and crisis in the euro-zone over a possible sovereign default, have exacerbated market uncertainty. In its Asia Pacific ex-Japan report, Axioma notes that the active risk of a 50-stock portfolio tracking the FTSE-Asia-ex-Japan benchmark has increased by about 40 basis points over the last three months.
Virtually all markets faced increases in risk; the only major exception to the rule in Japan, which suffered from unusually high risk levels due to the earthquake and tsunami earlier in the year. As a block, euro-zone countries had the highest forecasted risk of all major markets.
Predicted volatility for the FTSE Asia Pacific index stood at 21.7% as of 31 October 2011, up from 16.0% reported on 29 July 2011 and 17.5% a year ago, according to Axioma. The increase was even more notable for Asia Pacific ex-Japan, with 28.8% volatility at the end of October 2011 compared with just 17.0% the previous quarter.
By comparison, volatility stood at 30.1% for FTSE Europe in October, compared with 20.6% the previous quarter. In North America, the FTSE North America registered volatility of 23.3% in October, versus 14.3% the previous quarter.
Axioma characterised the last three months as marked by increasing volatility, high correlations and low dispersion among stocks, volatile factor returns, little risk distinction between industries, countries or currencies, making it increasingly difficult for investors to produce high active returns. The report also notes that cross-sectional predicted volatility across stocks, industries, countries and currencies remains low, suggesting it is currently very difficult to add value through stock picking.
Despite the volatility, Asian equity trading volumes had reached their lowest levels so far this year by October, led by a decline in trading activity in China and Japan, according to figures provided by Thomson Reuters.
Axioma, a provider of decision support, risk analysis and portfolio rebalancing and performance attribution tools, publishes its ‘Axioma Insight: Quarterly Risk Review’ in four separate editions focusing on risk trends and their implications for investors in US, European, Asia-Pacific and Global markets.