Predicted risk in global equity markets decreased in the second quarter as correlations between markets continue to lessen, according to a quarterly risk forecast from Axioma.
“The individual markets seem to be differentiating themselves,” said Melissa Brown, senior director, applied research, in a telephone interview. “Some of the huge drag investors are getting by big correlations is dissipating.”
Risk is down among nearly every major benchmark worldwide, including the Russell 1000 and Russell 2000, which are down 1.8 and 3.5 percentage points to 17.5% and 20.8%, respectively, from the first quarter.
The U.S. economy has been less affected by Europe than expectations six months ago, Ms. Brown said. Investors are peeling the equity markets to find the best places to invest. Risk now is well below the level of the middle and end of last year.
“The major story is the continued decoupling of markets,” Ms. Brown said. “The market doesn't seem to be as concerned of general problems as it did six months ago.”
The components of risk also are changing, as Ms. Brown noted there is less currency risk, but more country risk now.
“Money managers should recognize components of risk are changing, therefore something in their portfolio might need to change,” Ms. Brown said. “It's important to pay attention to risk factors because they can be very important in driving portfolio returns.”
While risk was relatively flat for countries like Germany, Switzerland and the U.K. and the FTSE Developed Europe index overall, it shot up for struggling eurozone countries Greece, Spain and Italy. Greece has essentially zero correlation to European equity markets now, Ms. Brown said. Spain is seeing a drop in correlation “to some extent,” but Italy “still seems highly correlated with Europe,” she added.