Data from the market analyst found that in early 2013, the performance and risk of countries was tightly correlated, with very few countries’ stock markets outperforming the pack.
At the start of 2013, only Greece was the standout economy in terms of risk and return, with other markets acting similarly to each other. But as the US taper became reality, some emerging markets started to exhibit higher risk and low returns, while developed markets have shown improving returns and lower risk.
Melissa Brown, senior director of applied research for Axioma, said: “Correlations in most markets have fallen, suggesting better diversification is possible for investors.”
Ms Brown highlighted Japan as an example. It saw the biggest increase in risk in the second quarter of 2013 but became less risky in the third quarter, although it remains “neck-and-neck with China as the riskiest of the major markets we cover,” she added.
There may be good news on the horizon as the Japanese economy improves, Alex Treves, head of Japanese equities at Fidelity Worldwide Investment, said, adding: “The patient, bottom-up observer can see signs of change.”
Adviser View
Emma Wilkinson, investment management director for Hertfordshire-based Richmond House Group, said: “We run discretionary portfolios that are invested for globally for diversification. I would agree with Axioma that 2014 could see another year of divergent risk/return characteristics delivered by different regions.
“However, part of that differential is the currency and Japan is a key example of this. If a sterling investor had not had exposure to the Yen in past year they might have doubled their returns. It can be hard to make currency calls on a short-term basis but some countries make decisions that affect the currency, such as in Japan, so you should factor that into a long-term investment view.”
