The downward trend in risk levels around the world continued into the first quarter of 2013, with two notable exceptions: Japan and China, according to the Axioma Insight Quarterly Risk Review.
While risk levels in the U.S. and Europe were similar at the start of the year, “Asia seems to be separating from the rest of the world,” said Melissa Brown, senior director of applied research and co-author of the review.
Japan's changes can be traced to its recent central bank currency intervention, which added an inflationary policy, and its strong stock market. “You've had this huge increase in the Japanese market but a hugely negative return in the yen, and a big increase in the riskiness of the yen,” Ms. Brown said. “Risk for many currencies is down, certainly relative to the dollar. The yen's risk increased while other currencies did not. It is really the result of actions by Japan's central bank.”
“China has always been separate,” said Ms. Brown. “China is going to look different from other countries just because the underlying economy is so different and so rapidly changing. China is considered an emerging market, yet it has such a big influence on developed markets because there is so much trade,” said Ms. Brown.
“At least for this particular quarter, China looks lot more like Japan. We've seen risk increase in both of those markets.”
That divergence among markets in the first quarter of 2013 wasn't a problem for investors, she said. “Most portfolio managers are looking at markets separately, particularly Japan and China. I think it's good news to see things move separately. That suggests it isn't one global theme; this time it's the markets themselves.”
The data show that investors are looking at individual investments on their own merits, as the impact of the global financial crisis fades.
The lower correlation among stocks in the first quarter is important, said Ms. Brown. “You're better diversified, and everything is not going to get clobbered at the same time. It's something that we are seeing in most markets. Japan has been an exception to that, probably as a result of the overall strength in the Japanese market.”
Key indexes including the Russell 1000, Russell 2000 and FTSE Emerging index in the first quarter “didn't even seem to break stride,” said Ms. Brown.
The Russell 1000 dropped 1.3% and the Russell 2000 dropped 1.9% in volatility. Some of the biggest drops in volatility were seen in automobiles and auto components and building products.
A slightly more dramatic drop came from emerging markets, where increased investment is improving liquidity, Axioma found.