Alexei Jourovski, head of equities, Unigestion explains why in the current market environment risk control is essential.
During significant market corrections, dispersion usually remains low initially, as systematic de-risking negatively impacts all stocks indiscriminately. This has also been symptomatic of the Covid-19 correction so far, which is why the downside resilience of some traditional defensive sectors (such as utilities) have been somewhat lower than during other historical periods.
We expect more dispersion to materialize in the coming weeks, as we expect stocks with more robust fundamentals and valuation levels to ultimately benefit from improving investor confidence.
In present market conditions, we believe that applying risk-management, which combines quantitative and fundamental analysis, is absolutely essential.
From a quantitative perspective, we at Unigestion make sure that our forward-looking volatility and correlation forecast remains robust in the current environment. In particular:
- our in-house risk model is relying on a dynamic look-back period based on the current implied volatility level (VIX index) in order to best adapt to current market conditions. In the current environment, the look-back period tends to shorten which puts more emphasis on the current risk factors.
- we are closely monitoring our transaction cost model to make sure it accurately represents the current environment. We observe that higher spreads and lower market depth make our model more cost-sensitive which materializes with reduced portfolio turnover.
From a fundamental perspective, we are focused on detecting stocks with new emerging risks linked to material exposure to international travel, oil, basic materials, discretionary consumption and growth. For example, we have taken action on reducing exposure to some of the most exposed stocks (Airport of Thailand, Krung Thai Bank). Another important risk indicator being monitored is the evolution of the Credit Default Swap (CDS) spreads of countries and underlying portfolio stocks, which is indicative of the implied default probability.”