Spain and Greece Decoupling, According to Axioma

Despite challenging market conditions driven by renewed concerns over the fate of Europe, changes in risk were relatively subdued in Q212, as increased short-term risk was countered by a decrease in medium-term risk, according to the latest edition of Axioma’s ‘Quarterly Risk Review’. The publication provides a comprehensive reference on the state of investment markets for portfolio managers, risk managers and other investment professionals.

“Risk estimates and correlations tend to spike in a major crisis, but that’s not what our data showed in the second quarter,” said Melissa Brown, senior director, applied research and co-author of the report. “Both risk and correlations remained well below their historical highs, underscoring the fact that investors are increasingly differentiating sources of risk, whether by country, currency, industry, etc, compared with past crises.”

A special Axioma study focusing on European risk revealed that the beleaguered economies of Greece and Spain were decoupling from the rest of Europe, in terms of both predicted risk and correlations. Country risk now makes up a larger portion of total risk, as currency risk, specifically for the euro, declined in Q212.

“Correlations overall rose in the quarter, but ended the period nowhere near prior peaks, suggesting that investors are not in the midst of a one-theme market,” said Brown.

Commenting on trends in Europe, Brown said: “Risk forecasts for major European countries and the euro appear to be stable or declining. In contrast, higher and still-increasing levels of risk appear to be concentrated in Greece and Spain, along with lower correlations with other markets.”

Statistical risk factors did not seem to pick up anything that was not reflected in the fundamental models. “This could be a positive sign, indicating an absence of lurking risk and, hence, the reduced likelihood of a ‘surprise’ in the coming months,” said Brown.

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