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Volatility outbreak

04 March 2020

Research Signals - February 2020

The shot of volatility that investors received in equity markets in the second half of January paled in comparison to the dose injected into stocks in late-February, with many regional markets experiencing their worst weekly loss since the financial crisis amid intensifying fears surrounding the coronavirus' impact on the global economy. Indeed, the J.P.Morgan Global Manufacturing PMI suffered its steepest contraction since May 2009, as the coronavirus outbreak disrupted demand, international trade and supply chains, with China the hardest hit as output and new business fell at survey-record rates. Investors, meanwhile, continued to inoculate their high momentum stock exposure with low beta trades (Table 1).

  • US: Amid uncertainty surrounding the impact of the coronavirus on corporate financials, investors favored firms with the highest analyst outlook, as gauged by 3-M Revision in FY2 EPS Forecasts, particularly for small caps
  • Developed Europe: The risk-off trade was prevalent in equity markets, confirmed by 60-Month Beta's top tier performance
  • Developed Pacific: Small cap stocks in Japan suffered the weakest returns during the market rout, as captured by Natural Logarithm of Market Capitalization
  • Emerging markets: High momentum stocks, as measured by Rational Decay Alpha, continued to briskly outpace the most undervalued names, as measured by Book-to-Market

Table 1

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