Risk in the first quarter of 2015 was all about one country, according to the Axioma Insight Quarterly Risk Review.
“It was almost exclusively driven by China,” said Melissa Brown, senior director of applied research at Axioma Inc., New York, and co-author of the review. “Chinese market returns were up 10% in a very short period of time. The result of that was a big increase in volatility in the Chinese market. Nothing compares to it.”
China also stands out when measuring correlation. “China's market zigs when another market zags,” said Ms. Brown.
Another standout when measuring volatility in the first quarter of 2015 was Greece, which has seen a lot of volatility over the past three years.
“It's always high, but it is always changing a lot,” said Ms. Brown. “If you are an investor and have a view on Greece, it's important to know how much volatility there is.” Due to the ongoing volatility in recent years, “you probably need to have much more conviction on Greece than on any other country.”
One surprise during the quarter was Switzerland's addition in early 2015 to the list of the most volatile developed markets, “which is an extremely unusual place for it to be,” said Ms. Brown. “It is usually one of the least risky equity markets, but the move to remove the cap on the Swiss franc by the Swiss central bank in January had a big impact on the equity market as well as the currency.”
(On Jan. 15, the Swiss National Bank discontinued the minimum exchange rate of the Swiss franc against the euro. The minimum rate had been in effect since 2011.)
Uncertainty over central bank moves in the U.S. also caused increased volatility with U.S. bonds. “Investors are still trying to assess the impact of a Fed tightening move, both in terms of the magnitude of the impact and the timing. At the end of the last year, the market viewed the Fed as tightening in six months. Even now, the market is still viewing the fed tightening six months out. That uncertainty breeds volatility. We have seen an increase in the volatility in both intermediate government and high yield spreads (since late 2014),” said Ms. Brown.
The first few months of 2015 also saw the relative riskiness between emerging and developed markets widen, Axioma found.
“They were almost equal at the end of 2014 but it's no longer (the case). Particularly after the European debt crisis, they kind of converged. This relative riskiness has popped up again. It was really sudden and it is almost completely because of China,” said Ms. Brown.
