While most of the quarter we saw a continuation of the low volatility and strong returns for risk assets we have observed for an extended period, the unexpected Brexit vote caused a dramatic shift with volatility in European markets reaching exceptionally high levels.
Ed Fishwick and Tara Sharma from the Risk & Quantitative Analysis Team analyse the post-Brexit risk environment and what this means for investors.
Since quarter end, however, markets with a few notable exceptions have settled down again. We believe, this paradox can be explained by the competing influences of high levels of uncertainty and accommodative monetary policy. As such, it represents the continuation of a long-running theme, but this long-term trend goes hand in hand with increased vulnerability to negative newsflow.
The heightened level of event risk exemplified by the recent Brexit vote and the susceptibility to changes in the accompanying newsflow require that short- to medium portfolios may be positioned for rapid reversals. We also note persistent trends in low volatility and high value stocks, together with stretched valuations in certain factors. In this environment the speed of response is crucial with investors needing to be able to reduce or add risk pro-actively.
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