European equity volatility research gives grim news to risk budgeters

European equity fund managers suffering from ‘volatility fatigue’, calculating risk budgets based on the size of stock movements, will find little happiness in the latest predictions about volatility in their stock universe from researchers at Axioma.

The US-headquartered analyst firm expects volatility of Continental shares, as represented by FTSE Europe, to be about as high between the start of November and April as it was one year ago.

At the end of July, European investors enjoyed a brief respite in how high volatility was expected to be.

But Axioma’s predictions of volatility then jumped by 10% by the end of October, back towards levels they had been at a year earlier.

It is mainly general ‘market risk’ driving the high expected [mid-term] volatility of 30.1% in October, compared to 20.6% three months earlier, says Melissa Brown (pictured), Axoima’s senior marketing director.

She noted: “Overall if you sat there and did nothing recently, your portfolio got riskier.

“But volatility in and of itself is not necessarily bad, and the market could go up as well. There’s a lot of opportunity here. If you think the market’s prospects are good, with the high volatility, one can get a lot of return. But there is not a lot of agreement on what will happen – hence the high volatility.

“Some managers may say they are happier to have more risk because they think there are better opportunities in the market, but others might say they told their clients they would keep their risk at a certain level, so they have either had to trade into less risky stocks, or have more stocks in the portfolio to bring the overall risk.”

Looking globally, Europe is expected to be significantly more volatile than FTSE’s benchmarks for North America (23.3%), Asia Pacific (21.7%), the developing worlds’ equities (26.7%) and emerging markets (25%). The expected volatility for FST All-World is 25%.

Of 13 indices covered reflecting shares globally, in North American, Asia Pacific, and Europe, only Japan’s has a lower predicted volatility now than its prognosis at the end of July.

The FTSE Eurobloc index has the highest predicted volatility, with FTSE Europe close in second place.

Europe’s stock volatility has, of course, reflected the markets’, and politicians’ reactions to the unfolding eurozone debt crisis.

In August, when uncertainty about the outcome was arguably at a peak, six of the nine risk factors Axioma uses in its analysis were over one standard deviation away from their average since 1999. They were exchange rate sensitivity; growth; leverage; liquidity; value; and volatility.



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