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Market Risk Insights: portfolio triage

In the Q2 2020 issue of Market Risk Insights, we provide our latest analysis of six key risk factors – volatility, correlation, stretch, liquidity, event and environmental, social and governance (ESG) – in order to help investors navigate the coronavirus sell-off.

Investor fear spikes 

The coronavirus pandemic has caused significant collateral damage for businesses, financial institutions, livelihoods and government services, while a collapse in both supply and demand has resulted in extreme volatility.

The crisis has elevated our focus on risk. We face risks to our own health, while the shutdown of shops and businesses has imperilled their survival. In this edition of Market Risk Insights, we use the concept of triage – a method to assign degrees of urgency to illnesses – to categorise and rank the different risks that investors face. 

See below for a snapshot of what we see to be three of the most pressing risks in the current environment, or read the report for a fuller picture.

The VIX spiked dramatically as the coronavirus crisis unfolded and remains elevated, although it is lower than it was at its peak. This suggests that markets tend to have longer memories of volatility-inducing events and is a reminder of the legacy of fear that can persist. Volatility is likely to remain stretched until the end of the public-health crisis comes into view and economies start to reopen.

Market volumes remained solid during the recent rout and subsequent retracement, and equity-market liquidity has stayed robust. Meanwhile, fixed-income liquidity deteriorated rapidly in the middle of March and remains challenged. We have noted before that fixed-income markets are more efficient at repricing risk than equities. The sharp divergence in equity and fixed-income liquidity in the past few months suggests that fixed income is once again the leading indicator.

The coronavirus pandemic swiftly eclipsed much of the public discourse on ESG issues, despite the fact that the pandemic is set to have a devasting effect on achieving the Sustainable Development Goals. Yet challenges can also present opportunities: ESG factors are more important than ever during times of crisis, and we believe the current disruption presents a unique opportunity to start on a different path and create a more green, equitable society.

An economy on life support

As we look to the rest of the quarter, economies seem just about sustained by government-aid programmes and central-bank support – for now. Yet these measures can’t last forever. Just as overstretched hospitals triage critical patients, investors must triage the risks to their portfolios and prioritise them. Read the latest edition of Market Risk Insights to take a deep dive into our assessment of the six risks currently confronting investors.   

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