Prisma Newsletter: March 2023
Equity Risk Indicator: high risk due to the banking crisis
In March, the US economy continued to grow, but the issue of high inflation remained a concern, leading the Federal Reserve to tighten further. Meanwhile, banking system troubles and takeovers of banks like Silicon Valley Bank, Signature Bank, and Credit Suisse created significant volatility and uncertainty in the financial markets. The recent moves by regulators have helped to calm markets and depositors, allowing economic fundamentals to once again become the primary determinants of broad financial market prices.
In regards to this context, the Equity Risk Indicator (ERIC) remained at a moderate risk level for most of the month, mainly because mid-term indicators continued to display high-risk values. However, during the week of Credit Suisse’s fall (March 15 to 22), ERIC showed high-risk values. Although this cautious behavior was not rewarded, it once again proved that ERIC quickly reacts to stressful situations and would have been able to significantly reduce drawdowns in case the situation would have worsened. Furthermore, our indicators were quick to realize that the situation had eased which is why ERIC displayed again a moderate risk level for the rest of the month. As a result, the 1-year performance of the ERIC indicator remains steady and the indicator allowed to outperform the S&P 500 index by approximately 6%.
Credit Indicator: maximum risk
The collapse of large banks and the resulting systemic anxiety in March pushed the Credit indicator, which already had very high-risk values, to show and maintain maximum risk.
Over the last year, the Credit indicator has outperformed its benchmark by 9.8%, with slightly positive returns and great stability. This illustrates that a credit indicator can provide excellent protection to an equity portfolio.
Macroeconomic Indicator: some slight improvement in March
Macroeconomic risk, which had begun to decline in early March, also increased during the week of the Credit Suisse collapse, before declining again until the end of the month. This accurate risk estimation allowed to benefit from the market rebound of the end of March.
领英推荐
The outperformance of the Macroeconomic indicator remained the same in March and the indicator outperformed by approximately 8.6% over a 1-year period.
Vega Indicator: volatility reduction in a contrasted month
In March, the Vega indicator was useful not for outperforming equities, as is normally the case, but for reducing volatility. Indeed, slightly ahead of Credit Suisse’s fall, the volatility metrics analyzed by Vega started to signal risk, and the indicator displayed high-risk values, pulling out of equities. Nevertheless, the quick reaction of the Swiss National Bank convinced the markets, which rebounded immediately. Vega was therefore unable to profit from this short crisis but nevertheless reduced the risk during this uncertain period.
The 1-year performance of the Vega indicator remains robust, and the indicator’s ability to anticipate has allowed it to achieve positive returns (+1.5%) when the S&P 500 index has fallen by almost 10%.
To receive the Prisma newsletter via email: