Asia Pacific Market Report - Asia Pacific Equities in a Correlated World

Jun 26, 2012

The 2008 financial crisis put global markets into a volatile “risk-on / risk-off” swing.  When investors worry about recession or deflation, their risk aversion goes up and they shift to low-risk assets, thus hurting risky assets like equities. In contrast, when investors expect a recovery or inflation, their risk aversion goes down and they shift into high-risk assets.  This binary attitude results in a high degree of correlation among global markets and may point to a common source of risk across all markets.  Under these conditions, the higher the market correlation, the higher the portfolio volatility.  This risk-on / risk-off climate has been with us for five years and investors are looking for ways to handle the correlated swings in global markets. In this report, we examine these high correlations and see if they affect the Asia Pacific markets (ex-Japan).  Barra regional models are used to gauge correlations among Asia, the U.S. and Europe, focusing on how Asia Pacific equities may be contaminated by global risk-on / risk-off swings.