We permit the publication of our auditors’ report, provided the report is published in full only and is accompanied by the full financial statements to which our auditors’ report relates, and is only published on an access-controlled page on your website, to enable users to verify that an auditors’ report by independent accountants has been commissioned by the directors and issued. Such permission to publish is given by us without accepting or assuming any responsibility or liability to any third party users save where we have agreed terms with them in writing.

Our consent is given on condition that before any third party accesses our auditors’ report via the webpage they first document their agreement to the following terms of access to our report via a click-through webpage with an 'I accept' button. The terms to be included on your website are as follows:

I accept and agree for and on behalf of myself and the Trust I represent (each a "recipient") that:

  1. PricewaterhouseCoopers LLP (“PwC”) accepts no liability (including liability for negligence) to each recipient in relation to PwC’s report. The report is provided to each recipient for information purposes only. If a recipient relies on PwC’s report, it does so entirely at its own risk;
  2. No recipient will bring a claim against PwC which relates to the access to the report by a recipient;
  3. Neither PwC’s report, nor information obtained from it, may be made available to anyone else without PwC’s prior written consent, except where required by law or regulation; and
  4. PwC’s report was prepared with Hermes Property Unit Trust's interests in mind. It was not prepared with any recipient's interests in mind or for its use. PwC’s report is not a substitute for any enquiries that a recipient should make. The financial statements are as at 25 March 2017, and thus PwC’s auditors’ report is based on historical information. Any projection of such information or PwC’s opinion thereon to future periods is subject to the risk that changes may occur after the reports are issued and the description of controls may no longer accurately portray the system of internal control. For these reasons, such projection of information to future periods would be inappropriate.
  5. PwC will be entitled to the benefit of and to enforce these terms.
I accept

1. Select your country

  • United Kingdom
  • Austria
  • Australia
  • Belgium
  • Denmark
  • Finland
  • France
  • Germany
  • Iceland
  • Ireland
  • Italy
  • Luxembourg
  • Netherlands
  • Norway
  • Singapore
  • Spain
  • Sweden
  • Switzerland
  • USA
  • Other

2. Select your investor type

  • Financial Advisor
  • Discretionary Investment Manager
  • Wealth Manager
  • Family Office
  • Institutional Investor
  • Investment Consultant
  • Charity, Foundation & Endowment Investor
  • Retail Investor
  • Press
  • None of the above

3. Accept our terms and conditions

By clicking Proceed I confirm I have read the important information and agree to the terms of use.


The Hermes Investment Management website uses cookies to remember your preferences and help us improve the site.
By proceeding, you agree to cookies being placed on your computer.
Read our privacy and cookie policy.

Tension breaker: how the risk plot could turn in Q4

Hermes Investment Office

Home / Perspectives / Tension breaker: how the risk plot could turn in Q4

Eoin Murray, Head of Investment
01 November 2016

Investors generally kept calm and carried on during the third quarter, despite the shock of the Brexit vote, as market activity throughout the northern summer generally went according to script. But rising correlation and liquidity risks threaten the sunny mood.

Hiatus for the holidays
The prevailing atmosphere, however, was somewhat darker than the dialogue might have suggested. Any calm – if indeed that was the genuine mood – was threatened by strong underlying tensions, which flared up briefly in September.

With the exception of this blip – which saw sell-offs across markets and sharp spikes in volatility measures – investors could be forgiven for thinking nothing had changed by the quarter’s end. ‘Normal’ viewing resumed as the fourth quarter approached – order was restored, nerves soothed.

But, if anything, investors are more wound up than ever despite stubbornly low readings from volatility indicators. This slightly surreal scenario has undoubtedly been underwritten by ultra-accommodative monetary policies from the world’s major central banks, which have absorbed most of the pressure for the time being.

It is unlikely, though, that low-to-negative interest rates can keep the story plodding along in such an uneventful way. A number of potential plot-turning events could easily unfold in the current quarter.

Turn of the screw
Liquidity and market depth generally remain weak, political risk abounds in both the impending US election and Italian vote on constitutional change. Meanwhile, following consistent, if low, US growth throughout the year, the US Federal Reserve will opine on US interest rates shortly before the Christmas break.

Either or all of these events have the potential to swing the storyline from a tension-building phase to full-on action. Rather than simply sitting back and watching the scenes roll by in real time, though, we believe investors need to prepare for likely events based on the best evidence available.

Within the Hermes Investment Office, we continually analyse five prominent forms of risk, from volatility to event risk, with several indices contributing to each metric. Our latest research reinforces the cautionary positions we have advocated in recent quarters:

Volatility measures continue to point to a low-risk environment. However, we believe that indicators mask considerable fragility. Much of this uncertainty centres on political developments but we cannot over-emphasise the link between leverage and volatility, which at low levels emboldens some market participants to over-gear their portfolios.

In the likely event of continued spikes in volatility for the remainder of this year, resulting market corrections will be, as always, painful.

Correlation risk became the dominant source of risk in the last quarter and we think that will remain the case through to year-end. Both of our measures in this category – correlation surprise (see figure 1) and correlation signal – provide some helpful indicators that markets were more fragile than a range of volatility measures suggested.

Figure 1. Correlation risk: telling a story that volatility cannot


Source: Hermes, Bloomberg as at 30 September

Stretch risk retains a cautionary air as various asset classes could quite easily remain at current levels without some form of exogenous shock to cause disruption. However, we note that stock buybacks, in particular, have buoyed valuations in the equity markets for some time – whether that continues remains to be seen.

Equity valuations generally appear most stretched relative to only the longest periods of history, and less so when compared to recent times. Meanwhile, bond yields remain at extreme levels despite recent rises. We continue to be wary of catalysts that have the potential to reverse equity highs and bond-yield lows.

Liquidity risk has developed from a fairly localised problem affecting primarily the credit markets to one that could become far more significant and far-reaching, potentially threatening all asset classes.

We believe that liquidity – or the lack of it - will be the most likely transmission mechanism for contagion should any significant shocks derail the current storybook stability.

One measure of liquidity that we use, ‘Kyle’s lambda’, which assesses the resilience of liquidity by gauging how much equity prices move in response to order flow, demonstrated how difficult it was to trade global equities during the volatility spike in September (see figure 2).

Figure 2. Kyle’s lambda: stock prices spiked with orders in September


Source: Hermes, Bloomberg as at 30 September

Event risk remains a mixed bag of signals, with our turbulence and absorption ratio metrics, for instance, at odds with each other. But we hold the view that markets as a whole, given the range of political and economic risks, remain in a vulnerable state, still very much reliant on liquidity provided by central banks.

A cautionary tale
The broad range of indicators we monitor continue to suggest that investors should err on the side of caution. While these metrics don’t irrefutably point to extreme risk, we believe that the market story could easily take an unexpected, and unpleasant, turn.

Share this post:
Eoin Murray Head of Investment Eoin is Head of Investment and a member of Hermes’ senior leadership team. Eoin also leads the Investment Office, which is responsible to clients for the investment teams’ consistent delivery of responsible, risk-adjusted performance and adherence to the processes which earned them their ‘kitemarks’. Eoin joined Hermes in January 2015 with over 20 years’ investment experience. Eoin joined from GSA Capital Partners, where he was a fund manager. Before this, he was Chief Investment Officer at Old Mutual from 2004 to 2008 and also held senior positions at Callanish Capital Partners LLP and Northern Trust Global Investments. He began his career as a graduate trainee at Manufacturers Hanover Trust (now JPMorgan Chase) and subsequently performed senior portfolio manager roles at Wells Fargo Nikko Investment Advisors (now BlackRock), PanAgora Asset Management and First Quadrant. Eoin earned an MA (Hons) in Economics and Law from the University of Edinburgh and an MBA from Warwick Business School. Eoin is a Freeman of the City of London, and a Liveryman of the Worshipful Company of Blacksmiths. He is a member of the Exmoor Search and Rescue team, a fully qualified Swift-water Rescue Technician and a Flood Water Incident Manager.
Read all articles by Eoin Murray

Find posts by author

  • Alex Knox, ACA
  • Andrew Parry
  • Andrey Kuznetsov, CFA
  • Audra Stundziaite
  • Claire Gavini
  • Dr Michael Viehs
  • Elena Tedesco
  • Emeric Chenebaux
  • Eoin Murray
  • Gary Greenberg
  • Geir Lode
  • Geoffrey Wan, CFA
  • Hamish Galpin
  • Harriet Steel
  • Jonathan Pines, CFA
  • Louise Dudley
  • Mark Sherlock, CFA
  • Martin Todd
  • Michael Russell, CFA
  • Michael Vaughan
  • Mitch Reznick, CFA
  • Neil Williams
  • Nick Spooner
  • Nina Röhrbein
  • Patrick Marshall
  • Philip Nell
  • Saker Nusseibeh
  • Silvia Dall’Angelo
  • Tatiana Bosteels
  • Tim Crockford
  • Tim Goodman
  • Tommaso Mancuso

Find posts by category

  • risk

Press contacts