Intech: Market stress signals persist

01/05/2018

Download



The Intech Equity Market Stress Monitor is a collection of five metrics Intech believe are reliable indicators of equity market stress, based on the company’s 30-year history of studying volatility.

Intech’s latest report - download here - suggests that risk for a dislocation in equity markets remains elevated, with European equity markets exhibiting the strongest stress signals while emerging markets show less signs of strain. These stress indicators suggest a continued potential for downside risk.  
 
 

​Indicators suggest heightened downside risk remains

After a long absence, volatility came roaring back during the first quarter of 2018. While big market moves rattled most major indices, they did little to move key indicators back toward their historical norms. The metrics comprising the Intech Equity Market Stress Monitor are telling us that the risk for a potential market dislocation persists.

At the end of the first quarter of 2018, five of the world’s major market indices – the Standard & Poor’s 500, MSCI World, MSCI EAFE, MSCI Europe and MSCI Emerging Markets – continued to deviate from their historic norms for several key indicators of equity market risk, including correlation, dispersion and index efficiency.

In fact, markets are exhibiting the same signs of strain that we observed in late 2017, before markets turned turbulent. During the first quarter of 2018 the S&P 500 ended its longest streak without a 3% correction and its second-longest stretch without a 5% decline. Whereas 2017 saw just eight trading days with +/- 1% or larger moves, the first quarter of 2018 alone posted 23 such trading days.

As was the case late last year, the MSCI Europe Index is showing the greatest signs of stress with five out of five equity-risk metrics on the extreme ends relative to historical norms.

Expect a reversion to the mean

Intech has been studying the relationship between risk and market stability for decades. Rather than rely solely on backward-facing measures, such as standard deviation, investors can monitor market stability, or lack thereof, by noting where an index’s risk sits relative to its historical ranges. When markets teeter too far from the norm, there is a higher probability of a large market event.

For all five metrics reviewed here, the normal range is 40% to 60%. Anything higher or lower signals a potential market instability, with extremes in the tails (ie, less than 20% or more than 80%) indicating greater risk.

Capital concentration, which measures how capital is distributed among stocks in an index, saw the greatest reshuffling during the first quarter. Among US markets, concentration increased noticeably, reflecting the ongoing dominance of mega-cap technology stocks. It was a different story in other developed equity markets, where capital continued to flow into smaller-cap stocks.

In a typical market, concentration is neither too high, nor too low. In the first quarter, just one of the five major indices – the MSCI World – sat in the normal range.

Correlation of returns (figure 1) – the extent to which index constituents move together – remained on the extreme low end in the first quarter of 2018, suggesting that idiosyncratic risk is high. This environment tends to favour active managers. However, because another indicator, dispersion of returns, is also low, active managers need to take on more incremental risk to potentially achieve higher excess returns.

 

Figure 1: Correlation of returns


Source: Intech proprietary model, as at 31 March 2018

Meanwhile, index efficiency stayed perched on the high end for all major indexes, which is to say that managers need to take on more beta risk to achieve above-market returns. This proprietary indicator looks at how much beta (market exposure) is required to construct an efficient portfolio (outperforming the index with less risk) by owning a selection of index constituents.

Not surprisingly, investors were slightly less bullish in the first quarter than they were during the last three months of 2017. Skewness of returns (figure 2), which gauges how investors respond to positive or negative surprises, suggests above-normal bullishness for the MSCI Europe and, to a lesser degree, the S&P 500. Sentiment for the MSCI EAFE and MSCI Emerging Markets indices, meanwhile, have moved closer to normal ranges.

 

Figure 2: Skewness of returns


Source: Intech proprietary model, as at 31 March 2018

While there are many ways to gauge market risk, our research has shown that these five metrics are indicative of the current level of market stability. As we look out over the next year, markets still have the potential for incremental gains. Nevertheless, until these measures move closer to their long-term averages, the risk for higher volatility will persist.

 

 

These are the views of Intech at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any sectors, indices and securities mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information presented does not qualify as investment advice or a recommendation.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

For promotional purposes.


Important information

Please read the following important information regarding funds related to this article.

Janus Henderson Intech European Core Fund

For institutional/ sophisticated investors / accredited investors qualified distributors use only.

All content in this document is for information or general use only and is not specific to any individual client requirements. The information contained in this document is referential and may not be construed as an offer, invitation or recommendation or investment advice, nor should be taken as a basis to take (or stop taking) any decision.

Janus Henderson Capital Funds Plc is a UCITS established under Irish law, with segregated liability between funds. Investors are warned that they should only make their investments based on the most recent Prospectus which contains information about fees, expenses and risks, which is available from all distributors and paying agents, it should be read carefully. An investment in the fund may not be suitable for all investors and is not available to all investors in all jurisdictions; it is not available to US persons.  Past performance is not indicative of future results. The rate of return may vary and the principal value of an investment will fluctuate due to market and foreign exchange movements.  Shares, if redeemed, may be worth more or less than their original cost.

Janus Henderson Group plc and its subsidiaries are not responsible for any unlawful distribution of this document to any third parties, in whole or in part, or for information reconstructed from this document and do not guarantee that the information supplied is accurate, complete, or timely, or make any warranties with regards to the results obtained from its use. As with all investments, there are inherent risks that each individual should address.

The distribution of this document or the information contained in it may be restricted by law and may not be used in any jurisdiction or any circumstances in which its use would be unlawful.

Issued in Europe by Janus Capital International Limited (“JCIL”), authorised and regulated by the U.K. Financial Conduct Authority. Janus Capital International Limited (“JCIL”) is an entity registered and operating under the laws of the United Kingdom and Janus Capital Funds plc. is registered under the legislation of Ireland.

The extract prospectus (edition for Switzerland), the articles of incorporation, the extract annual and semi-annual report, in German, can be obtained free of charge from the representative in Switzerland: First Independent Fund Services Ltd (“FIFS”), Klausstrasse 33, CH-8008 Zurich, Switzerland, tel: +41 44 206 16 40, fax: +41 44 206 16 41, web: http://www.fifs.ch. The Swiss paying agent is: Banque Cantonale de Genève, 17, quai de l’Ile, CH-1204 Geneva. The last share prices can be found on www.fundinfo.com. For Qualified investors, institutional, wholesale client use only. Outside of Switzerland, this document is for professional use only. Not for onward distribution.

This material is strictly private and confidential and may not be reproduced or used for any purpose other than evaluation of a potential investment in Janus Capital International Limited’s products or the procurement of its services by the recipient of this presentation or provided to any person or entity other than the recipient of this presentation.

We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Janus Capital Management LLC serves as investment adviser. Janus, Intech and Perkins are registered trademarks of Janus International Holding LLC. © Janus International Holding LLC. For more information or to locate your country’s Janus representative contact information, please visit www.janushenderson.com.

Specific risks

  • This fund is designed to be used only as one component of several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • If the Fund holds assets in currencies other than the base currency of the Fund or you invest in a share class of a different currency to the Fund (unless 'hedged'), the value of your investment may be impacted by changes in exchange rates.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
  • The Fund uses mathematical formulae to select investments. There is a risk that the processes used to invest in shares with higher volatility and low price-correlation may not achieve positive returns or outperform.

Risk rating

Janus Henderson Intech U.S. Core Fund

For institutional/ sophisticated investors / accredited investors qualified distributors use only.

All content in this document is for information or general use only and is not specific to any individual client requirements. The information contained in this document is referential and may not be construed as an offer, invitation or recommendation or investment advice, nor should be taken as a basis to take (or stop taking) any decision.

Janus Henderson Capital Funds Plc is a UCITS established under Irish law, with segregated liability between funds. Investors are warned that they should only make their investments based on the most recent Prospectus which contains information about fees, expenses and risks, which is available from all distributors and paying agents, it should be read carefully. An investment in the fund may not be suitable for all investors and is not available to all investors in all jurisdictions; it is not available to US persons.  Past performance is not indicative of future results. The rate of return may vary and the principal value of an investment will fluctuate due to market and foreign exchange movements.  Shares, if redeemed, may be worth more or less than their original cost.

Janus Henderson Group plc and its subsidiaries are not responsible for any unlawful distribution of this document to any third parties, in whole or in part, or for information reconstructed from this document and do not guarantee that the information supplied is accurate, complete, or timely, or make any warranties with regards to the results obtained from its use. As with all investments, there are inherent risks that each individual should address.

The distribution of this document or the information contained in it may be restricted by law and may not be used in any jurisdiction or any circumstances in which its use would be unlawful.

Issued in Europe by Janus Capital International Limited (“JCIL”), authorised and regulated by the U.K. Financial Conduct Authority. Janus Capital International Limited (“JCIL”) is an entity registered and operating under the laws of the United Kingdom and Janus Capital Funds plc. is registered under the legislation of Ireland.

The extract prospectus (edition for Switzerland), the articles of incorporation, the extract annual and semi-annual report, in German, can be obtained free of charge from the representative in Switzerland: First Independent Fund Services Ltd (“FIFS”), Klausstrasse 33, CH-8008 Zurich, Switzerland, tel: +41 44 206 16 40, fax: +41 44 206 16 41, web: http://www.fifs.ch. The Swiss paying agent is: Banque Cantonale de Genève, 17, quai de l’Ile, CH-1204 Geneva. The last share prices can be found on www.fundinfo.com. For Qualified investors, institutional, wholesale client use only. Outside of Switzerland, this document is for professional use only. Not for onward distribution.

This material is strictly private and confidential and may not be reproduced or used for any purpose other than evaluation of a potential investment in Janus Capital International Limited’s products or the procurement of its services by the recipient of this presentation or provided to any person or entity other than the recipient of this presentation.

We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Janus Capital Management LLC serves as investment adviser. Janus, Intech and Perkins are registered trademarks of Janus International Holding LLC. © Janus International Holding LLC. For more information or to locate your country’s Janus representative contact information, please visit www.janushenderson.com.

Specific risks

  • This fund is designed to be used only as one component of several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • If the Fund holds assets in currencies other than the base currency of the Fund or you invest in a share class of a different currency to the Fund (unless 'hedged'), the value of your investment may be impacted by changes in exchange rates.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
  • The Fund uses mathematical formulae to select investments. There is a risk that the processes used to invest in shares with higher volatility and low price-correlation may not achieve positive returns or outperform.

Risk rating

Share

Important message