After a mostly sedate year, risk bubbled to the surface in the final quarter of 2014, according to the Axioma Insight Quarterly Risk Review.
“Whether it was countries or currencies or industries, we just basically saw volatility increase by quite a bit,” said Melissa Brown, senior director of applied research at Axioma Inc., New York, and co-author of the review. “Things were relatively quiet until then.”
Some surprises — like the increased volatility in the yen — popped up, although risk was expected in oil-related industries or places like Greece or Russia. “In some cases the magnitude of the increase was unusual. It is also somewhat unusual to see risk go up everywhere,” said Ms. Brown.
Increased currency volatility also marked the quarter. “As most became weaker against the dollar, basically every currency we look at saw a big increase,” she said. Of the major developed market currencies, the yen was the most volatile and had the sharpest increase. That is likely to change in the first next quarter of 2015, following the Swiss National Bank's decision to abandon the franc's cap against the euro.
Fixed-income investors weren't immune to higher volatility either, Axioma found, with U.S. and European bonds both seeing increased volatility. “I think the same forces that were driving the equity markets — weakening of currencies, concerns about individual European markets, whether there was deflation coming — they are directly driving bond markets also,” she said.
For some countries, the spike in volatility was related to economic news. Although that was expected in Greece, volatility also jumped in China and Japan, Axioma found. “Japan has kind of found its way into the list of the most volatile countries,” said Ms. Brown. That could be due to a split between domestic and foreign investors in the Japanese market, or the fact that the country has a relatively new economic program, she said.
What did not happen as expected was volatility related to declining oil prices. Although declines started in May, “it seems like the market woke up in October,” said Ms. Brown. “There was a long lag between the start of the price decline and a jump in industry-related volatility.
In previous quarters, energy stock volatility in North America and Europe was stable — but that changed dramatically in the fourth quarter. “If you were an asset manager with energy stocks in your portfolio, you kind of woke up one day.”
More unusual was the volatility spread between countries, from 5% to 10% in the beginning of the year, up to 7% to 27% at the end.
“From the point of view of an active manager, it wasn't just if you were invested in energy, it was (about) what part of the world were you getting the energy,” she said. n
