Investment strategies in a low conviction environment: From risk management to new opportunities

Recent political events on either side of the Atlantic have intensified uncertainty among investors about the outlook for all mainstream asset classes. Dovetailing with the unwinding of accommodative global monetary policy, this has created an environment of low investor conviction.

A notable feature of market returns in recent months has been the accelerated erosion of these very high correlations between asset classes. Patrick Kondarjian, Head of Institutional and Wealth Management Solutions, EMEA, at HSBC’s Client Solutions Group explains that this has been observable in rising rotations as well as in increased dispersion between sectors and in the returns of single stocks within sectors. It has also been suggested by the recent decline in the HSBC Risk-On Risk-Off (RORO) index. Created in 2010, this combines the rolling correlations of 34 assets encompassing commodities, equities, rates, FX and credit within a single index. An increase in the RORO index implies a rise in cross-asset correlations, while a decline suggests a weakening in correlation. The chart below shows the ‘performance of the index’ and incorporates simulated past performance of the index for the period July 1992 to July 2010 after which time actual performance is shown.

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