The risk story in the final quarter of 2013 was largely about currency, particularly beyond the U.S., according to the Axioma Insight Quarterly Risk Review.
While currencies started 2013 at very different levels of volatility, those levels converged by the end of the year. “There seemed to be less distinction across all of the currencies,” said Melissa Brown, senior director of applied research at Axioma and co-author of the review. “The volatility of the volatility came down.”
Throughout the second half of 2013, Axioma tracked higher risk and lower returns for emerging markets over developed markets. “The benefits for an asset manager to select the right country became even more important. Good solid economic analysis paid off in the fourth quarter,” she said.
“If you were investing in countries that had big current account deficits you were much more hurt. If you dialed back nine months before, it really didn't matter. But what became critically important (was) the ability to distinguish countries that can be successful even if they don't have the liquidity spigot pointing at them full blast,” she said.
“You need to be more aware of the relevant winners and losers,” Ms. Brown added.
Another trend in 2013 was the seesawing of equity market volatility, with big differences between emerging and developed markets.
“At the beginning of the year, emerging markets looked very much like. By the end of 2013, Greece still stood out in volatility, but you also saw a big separation between emerging and developed (markets),” said Ms. Brown.
Emerging markets ended the year in general with poor returns and greatly increased volatility, while developed markets ended the year with strong returns and low volatility. The two types of markets “really looked different from each other at the end of the year than they did at the beginning of the year,” said Ms. Brown.
Correlation matters as well as volatility when it comes to stocks. While high correlation can mean markets are calm, “it's much more difficult to pick the winners and losers,” Ms. Brown said.
Bond markets also saw decreasing volatility in the last quarter of 2013, with the exception of U.S. Treasury securities, as markets in general saw less risk. Since then, things have changed a lot, she said.
“At the end of the year there was very little to suggest that we were going to have this kind of upheaval. I don't think people were expecting the markets to go down as much as they did in early 2014,” she said.