Risk in the third quarter came down in most markets, according to the Axioma Insight Quarterly Risk Review.
“The last quarter, we were talking about all these increases in risk. I guess the market decided it just didn't care,” said Melissa Brown, senior director of applied research and co-author of the review.
“When people are getting into the market, there tends to be more of a ratcheting up; you tend to see risk come down,” she said.
Some of that reduced risk she attributes to the Federal Reserve's decision to stand pat with its bond purchase and low-interest-rate strategy. “A lot of it is based on the Fed not doing anything,” she said. Even in Japan, where the central bank has been active, “we did see risk come way down, but Japan's risk is higher than it's been. Things are looking better for Japan, but not great.”
Another theme in the quarter was more differentiation among markets. “We are seeing emerging markets pull away from the rest of the markets. Emerging markets have become higher risk and lower return.”
“You are also seeing a lot of differentiation within emerging markets. In Indonesia and India (see bond table), risk return has been really bad, whereas in other countries like Malaysia and Poland, it's not.”
Axioma also found more movement in currencies. “I think there's more bouncing back and forth, more volatility,” she said. One particular standout was India's rupee. The rupee's volatility, at 3.2, was much greater than any other currency in the emerging markets universe.
Aside from some movement in the bond markets, “we didn't see wild moves in most things. Whereas equities markets really settled down, bond markets did not — for example, (in) Brazil, India, Indonesia and South Africa. But not all markets reacted that way. Over time they went up, but they also became more volatile,” Ms. Brown said.
This quarter's analysis includes information on various countries' bond yields, which in prior quarters had been mainly U.S. and European numbers. It was a different story for emerging markets bonds, where yields “basically did nothing for the first three months, some did nothing the second quarter, but then all of a sudden they jumped in the third quarter,” she said.
Axioma is also focusing more on multiple asset classes in addition to equity markets.
She noted that while correlation among asset classes has continued to come down, the recent U.S. government shutdown and near-default drama is going to affect the next quarter: “We know we are going to see changes as we look at the fourth quarter data.”