Qontigo Insight Quarterly

Risk fell again across most indices in Q2 – US short horizon risk finally retraced its path back to where it stood before the 2020 crisis. Almost all components of risk contributed to the decline.

In Q1, most markets continued to build on the gains achieved in 2020, while risk changes were mixed across regions.

In a surprising turn of events, most equity markets finished 2020 with sizable gains—and the fourth quarter unquestionably did its part. Benchmark risk continued to slide in Q4—except for a blip in November—but still ended the year higher than where it started. Factor returns went wild in Q4 and many regions saw outsized returns for the year.

The global equity market recovery continued in the third quarter, as benchmark risk slid. But not all components of risk participated in the decline, and volatility remained much higher than it was when the year started.

Equity markets posted one of the best quarters in more than a decade, but most were not able to cross into black territory for the year.

The first quarter of 2020 came in roaring like a lion and went out like a (slaughtered) lamb. After stock indices were pushing new records in the first half of the quarter, the bloodbath in equities that followed not only ended the longest-running bull market in the US history, but also threw indices worldwide into a bear market.

2019 was a remarkable year, with benchmarks around the world climbing to new records, while volatility plunged. Both emerging and developed markets shared in the overperformance, with all components of risk falling for both markets. However, style factors saw mixed results, with few reporting outsized returns for the quarter or year.

Markets around the globe wavered over the past three months, but the decade-long global bull market endured in the third quarter. Despite the market’s gyrations, risk was little changed, with most major indices seeing only a relatively small rise in risk from the end of the second quarter to the end of the third quarter. Nonetheless, a lot has happened beneath the surface.

While equity markets were strong overall in Q2 – and risk levels did not stand out – some trends were troubling and investors should be cognizant of them. This report contains a detailed analysis of what happened to top-line risk and its drivers across the globe in the quarter, as well as a detailed analysis of style factor performance.

Stocks rallied around the globe in the first quarter of 2019, with most indices nearly recouping the steep losses of the previous quarter. Stocks rose as major central banks kept interest rates unchanged, allaying investor concerns of a global economic slowdown. With most US economic indicators on the positive side, some US indices recorded the biggest quarterly gains since the global financial crisis, while others approached record highs.

Year-end 2018 was the antithesis of the close-out in 2017. While investors reveled in large equity gains and low volatility the year before, 2018 brought the misery of steep losses and high levels of volatility. Markets were choppy throughout the year and especially in the fourth quarter, with stocks wavering between gains and losses.

Q3 2018 saw large divergences between indexes typically viewed as “risk on”-type assets and their presumably less-risky counterparts. Top-line risk was down led by the fall in market risk, but other sources – many of which are the things managers tilt on and that drive active risk  –  actually bucked the market trend and increased.