Risk in the second quarter of 2012 continued to drop in the U.S. and worldwide, with one notable exception, according to data from Axioma Inc.
“It still seems to be all about Greece, with maybe a little bit of Spain and Italy thrown in,” said Melissa Brown, senior director of applied research for New York-based Axioma, which develops risk analysis, portfolio rebalancing and performance attribution tools.
Axioma's risk ratings represent the range of returns possible for markets, showing how much the index could move up or down over the next six to 12 months. The index volatility chart shows the daily predicted risk levels over the past five years for the Russell 3000, FTSE Developed and FTSE Emerging markets indexes. That chart allows investors to gauge the current “top line” level of risk for the quarter compared with previous periods and other markets, Ms. Brown said.
In the second quarter, the FTSE Emerging Markets risk rating was 20.3%, and the FTSE's Developed Market rating was 25.4%. In comparison, the Russell 3000 rating of 17.5% for the U.S. “is an awfully attractive number,” Ms. Brown noted.
Greece's risk rating of 60% is nearly twice the rating of Spain, the next highest country, at 36%. Even though Spain and Italy had higher risk ratings than their European neighbors — Switzerland, for example, hit its lowest risk point in five years at 20% — their risk levels “are still what we'd expect to see over a quarter,” Ms. Brown said.
The big difference in risk ratings among European countries also shows that Greece's problems stand apart.
While emerging markets still have the volatility, “they are not going to be highly correlated. What moves markets in Indonesia or China or Brazil is not going to be the same. As an investor, you may want to peel down the layers of a country,” she said.
In the U.S., risk continued to decline, particularly among some of the riskiest industries such as airlines and autos, which dropped 4.1 points and 4.5 points, respectively. “We've seen some very large declines. Investors seem to think that autos are less risky than they used to be,” Ms. Brown said.
“Even a lot of these less-risky industries had fairly large declines. They started out low and got even lower.” Telecommunications, utilities, and food retailing each dropped three points or more.
Ms. Brown cautioned that “high risk in and of itself isn't bad. The opportunities are there. It's important to look at a return forecast in the context of "what are you getting for what you are paying?'”