Asia Alpha Risk Report: Jan-Feb

Forward:

When I first joined Linedata Services Asia-Pacific team (formerly QRMO) one of my goals was to find out how I could continue to publish great content on LinkedIn that most importantly can be of value to the wider LinkedIn community. I did not have to search long before I came across our Risk Managements team’s monthly risk newsletter which, although took many man-hours to research, prepare and publish, was only being distributed and enjoyed by a few members on our risk newsletter mailing list, mostly existing clients who we had already designed risk management systems for. After some creative input, reformatting and a newly purpose built risk model to go with it, I am happy to present the first edition of the Asian Alpha Risk Report for the month of Jan-Feb, specifically designed for LinkedIn.

What it is and how we do it:

We understand that as portfolio managers you will already have multiple specifically fine-tuned analytics that will help you manage risk for your portfolio, at a bare minimum, more than an in-depth newsletter like ours can deliver. However, what the Asia Alpha Risk Report has been designed to do is to give you another view on the market and your investments, highlighting the impacts of global events on the industries you have allocated to, opposed to the whole market. Hopefully with any luck, after reading our newsletter, we can help make you more better consider risk in the future by highlighting some recent impactful events, their themes and effects on the market and underlying industries.

For each given month our risk team has a look at the biggest events that have happened across the region and globally and runs them through our purpose-built model to extrapolate what the most impactful events were on the market and caused the biggest ‘shocks’ to their respective markets. We then ask the model to show us the top 5 and bottom 5 biggest industry movers within that shock period. These industries are defined by the Global Industry Classification Standard (GICS) set by MSCI, a staple to the investor focused OPERA Reports. As mentioned above the point of the exercise is to give you a different perspective on the market and world around you, hopefully making you more risk averse.

Asian Alpha Risk Report Jan-Feb

The Big Picture for Jan-Feb:

Despite a small spat in the Middle East between the USA and Iran robust incoming data suggest an upswing in global activity, as manufacturing recovers, and healthy labour markets continue to support consumption.

The potential impact from the novel coronavirus outbreak—not yet outside of China—now casts a shadow over this optimistic scenario. The implementation of far-reaching containment measures implies a negative effect on activity, which will be highly concentrated but not limited to China.

The Indian government unveils their 2020 budget to limited positive feedback.

As the coronavirus outbreak spreads globally, the implications are far reaching and impacts on the world markets evolving ...

In this edition we look at 4 impactful events over the January-February period;

1. 3rd-6th January: The US-Iran Tensions
2. 29th-31st January: The Coronavirus Outbreak in Greater China
3. 31st January-3rd February: The 2020 Indian Budget
4. 21st-25th February: The Coronavirus Effect Goes Global

3rd – 6th January: US-Middle East

US-Iran Tensions

The optimism of 2020 is quickly dashed when the U.S, without warning or collaborating with it's allies, calls a drone strike on a top Iranian General on Iraqi soil, sending oil to new highs and causing markets globally and across Asia to fear regional escalation or worse ...

• Iranian general killed in US drone strike
• Oil steadies as market ponders Iran's next move
• WTI Oil gains 3.42%, reaches April 2019 highs
• Iraq calls on foreign troops to leave
• Trump threatens sanctions on Iraq if U.S. troops forced to leave
• U.S. will also act if Iran strikes back 

Future portfolio risk themes:

Whilst the market quickly saw through the sabre-rattling by the U.S and Iran, resource importing markets across Asia such as Hong Kong, China, India and Korea were hit harder initially than those resource rich and geographically further away Australia or the U.S. Future similar risk themes that affect your portfolio could be:

• Sudden oil price spike
• Tensions in the Middle East

29th – 31st January: Greater China

Chinese New Year and Coronavirus Outbreak

Although rumors online had been circulating about a new virus spreading in China, coming from Wuhan, the focus in China was on the most important date in the Chinese calendar, Chinese New Year. As it became apparent that this new virus was to be taken serious, it was too late. Chinese New Year celebrations had begun and the largest human migration in history had begun as workers around China returned home, taking with them the new virus. As markets reopened on the 29th panic set in ...

• WHO declares global emergency
• Number of countries close border with China
• Financial markets first open in Hong Kong and Mainland China since lunar new year

Future portfolio risk themes:

Although at this stage the novel-coronavirus and panic are largely localized to Greater China, the numbers of cases is growing around Asia. The shock on Hong Kong and Chinese markets are well documented, markets falling dramatically upon open. Future similar risk themes that affect your portfolio could be:

• Regional pandemic
• Sudden disruption/slowdown to Chinese economy

31st January - 3rd February : India

2020 India Budget

The Union budget in 2020 was presented in a backdrop of a slowing down of the Indian economy with estimated GDP growth for 2019-20 being at an 11-year low of 5%. Despite a slowing economy the budget focused more on social issues than economic ...

• BSE Sensex dips -2.43%
• Negative reaction to the new budget despite the fact Indian economic growth is projected to rebound
• Central bank ponders next move

Future portfolio risk themes:

Although there was some winners, the ill-received budget put most industries in India on the retreat. A slowing economy and a focus on social issues could present both short and long term risk to managers. Future similar risk themes that affect your portfolio could be:

• Indian fiscal policy

21st – 28th February: Global

Coronavirus February Shock

Although the novel coronavirus had affected many Asia-Pacific countries for over a month by now, the sudden realization of its effects on global supply chains and sudden outbreak in Italy, Iran and South Korea catches markets off guard. An unexpected panic equity sell-off across markets globally sets in ...

• VIX jumps +157.78%, Oil WTI dips -16.77%
• Renewed fears of the impact of coronavirus on the global economy
• Numerous cases reported in Italy, Iran and South Korea lead to market sell off
• Decline in global economy growth anticipated
• The situation is evolving …

Future portfolio risk themes:

The panic equity sell-off that set in caused markets globally to retreat, highlighting a key risk to equity portfolios, as few industries were safe across Asia and globally. February the 27th was noted as the biggest sell-off in history for the Dow. Future similar risk themes that affect your portfolio could be:

• Slowdown in global economy
• Sudden disruption to the global supply chain
• Spike in volatility
• Global pandemic

Future Report Inclusions:

• Measured volatility
• FX Risk
• Fixed Income Risk

Shocking your portfolio

Contact me if you would like to run any of the above or historical scenario against your portfolio . We would be happy to run it through our purpose built model or risk engine and stress test it for you. Alongside VaR testing, Greeks and exposures one of our cornerstone offerings for risk management are our portfolio historical stresses or 'what if' scenarios.

Sources:

Pricing: Reuters Eikon, Investing.com

Contributors:

M.Jarvis, M.Bisht