Good grief

According to a recent paper from Societe Generale's global engineering and strategy team, the financial markets' response to the 2008 crash is best understood in terms of the five stages of grief outlined by E Kubler-Ross.

First came denial in 2009, followed by the more active emotional response of anger in 2010, when hopes of a quick recovery were dashed, austerity became the new black and the flash crash showed that, on top of everything else, all was not well with the structure of the equity markets. In 2011, as the focus of concern switched from the survival of the banking sector to the survival of the euro-zone, the markets first bargained then fell into a passive depression in 2012 as the government debt crisis dragged on, both in Europe and in the US. But 2013 will be the year of acceptance in which we can finally move on, look forward and identify some real value in the equity markets.

"It is not necessarily that the economy has markedly improved, it is mainly that the current downside tail risks are better apprehended, and that without systemic risk, we can for the first time in years consider the potential returns from holding equities," the report argues.

Many asset managers and end-investors will be hoping that this elegant theory proves correct, even though the bank is at pains to point out that this does not give the green light for a major asset allocation shift.

Perhaps the point is more that volatility levels in general are dropping along with correlations, allowing for risks and potential returns to be identified on a sector-by-sector or even stock-by-stock basis.

In time, this might also mean investment decisions become easier to implement by trading desks that, over the past 12 months or so, have conducted increasingly detailed execution analysis prior to releasing their most important trades into the market. But for the moment, continued evidence of sharp volatility spikes in reaction to news flow, suggests that the nimblest of strategies will be the most popular.