RiskWatch for Q2 2023

RiskWatch provides recent data on volatility and correlation, the two components of risk, for U.S. and global equity and fixed-income markets. The equity data are derived from Qontigo's medium-term fundamental risk models. One set of tables is designed to capture U.S. market sectors plus countries and currencies with the highest and lowest levels of volatility, and how that component of risk has changed since the end of the prior quarter. The highest and lowest correlated countries within developed and emerging markets are also highlighted. Another table illustrates how currency volatility can be a major driver of risk in multicountry benchmarks and can often change substantially from one quarter to the next. The fixed-income data, detailed in the multiasset-class section, consist of U.S. and eurozone government yields, investment-grade and subinvestment-grade spreads as well as correlations among those asset classes and selected currencies. Note that the following charts use the Axioma WW4 (worldwide) model: predicted volatility by currency, predicted volatility by country and country-country correlations. Data are as of June 30, 2023. Change compares with the previous quarter.

The dominance of the information technology sector has largely been a U.S. phenomenon. The technology sector — along with a few companies not technically classified as technology but thought of as technology-driven though they fall into the consumer discretionary sector — accounted for more than half of the strong U.S. return in the second quarter. In contrast, the technology sector had a much smaller impact on other developed markets, and the return for developed markets ex-U.S. was correspondingly lower. The information technology and consumer discretionary sectors now account for almost 40% of the weight in the U.S. market and more than half the risk. Outside the U.S., the combined sectors are only 20% of the weight and 23% of the risk. Therefore, the dominance of the technology sector is far more of a U.S. phenomenon, and investors should be cognizant of the correspondingly high contribution to risk.