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Speaker 1: se i C dot com slash imagine. Stocks have resumed
Speaker 1: a drop that has sent them law in six of
Speaker 1: the last seven days. Right now, the SMP five index
Speaker 1: down three tenths of one percent, down six points to
Speaker 1: two thousand, seventy one. Nastack down thirty eight, a drop
Speaker 1: of eight tenths of one percent down, Industrials down fifty one,
Speaker 1: a drop of three tenths of one percent, The tenure
Speaker 1: down ten thirty seconds. Looking at the yield of one
Speaker 1: point six one percent, Gold down a dollar sixty twelve
Speaker 1: ninety six, the ounce dropped there of point one percent.
Speaker 1: Crude Oil West Texas Intermediate rebounding today a three point
Speaker 1: rallying a dollar fifty two right now to seventy three.
Speaker 1: I'm Charlie Pellock. That's a Bloomberg business flash the Brexit
Speaker 1: vote on Bloomberg Radio. Brexit. It will be the vote
Speaker 1: heard around the world and could certainly rattle financial markets,
Speaker 1: even though day by day stocks, bonds, currencies have been
Speaker 1: adjusting their values as the risk of the Brexit rises
Speaker 1: and as the chance of the remain sometimes falls. Bill
Speaker 1: Morokoff joins this now. He's head of research at Axioma. Actually,
Speaker 1: it provides factor based risk models and profoil portfolio construction
Speaker 1: tools for equity investors. So of course they've applied these
Speaker 1: tools to the Brexit and what it could do to
Speaker 1: markets around the world. Bill, welcome to the show, and
Speaker 1: thank you for sharing a research. Thank you very much
Speaker 1: for having me. It's a pleasure to be here. So
Speaker 1: first of all, tell us what you use. How do
Speaker 1: you look at this question for example of how Brexit
Speaker 1: could affect stocks. You say that your opinion, equities could
Speaker 1: lose nearly of their value in the aftermath of a
Speaker 1: Brexit vote. That's correct. My research looked into politically driven
Speaker 1: events with significant market impact, and we found cases of
Speaker 1: equity and currency markets dropping twenty over a two to
Speaker 1: three months horizon. So this formed the basis of our
Speaker 1: stress test analysis. Now let me be clear that's not
Speaker 1: a prediction or a forecast. We don't have a crystal
Speaker 1: ball is so this will happen. But prudent risk management
Speaker 1: requires considering severe but plausible stresses and examining the impact
Speaker 1: on a portfolio. What are some of the tactics that
Speaker 1: you would employ in order to measure this risk and
Speaker 1: also mitigate the risk. Sure So in measuring it, besides
Speaker 1: the correlations the volatilities we put in, we look to
Speaker 1: the historical experience of the European Greek debt crisis, specifically
Speaker 1: the summer of two thousand and eleven, and also periods
Speaker 1: like Black Wednesday from September when the pound left the
Speaker 1: exchange rate mechanism. We also took a look at the
Speaker 1: Scottish referendum, and we're doing that in order to get
Speaker 1: a sense for what could be the magnitude of shocks
Speaker 1: and how the markets moved together. We then take our
Speaker 1: enterprise risk platform and put those in the shocks and
Speaker 1: random against a portfolio of European bonds and equities to
Speaker 1: see what the impact could be. And clearly, a huge
Speaker 1: shock to the foot see shock to the decks leads
Speaker 1: to significant losses in the in these portfolios. But it
Speaker 1: is very consistent. What's what we have observed in the
Speaker 1: past when there have been political crises and markets have responded.
Speaker 1: What about US stocks? Sure? Well, of course what we've
Speaker 1: seen in the past is when there's been a major disruption,
Speaker 1: markets tend to become very correlated correlation and goes to
Speaker 1: almost one. So in our in our stress test, we
Speaker 1: actually did shot the S and P five plunder going
Speaker 1: down to capture that kind of effect. And of course
Speaker 1: if you put in a portfolio with US exposure, you're
Speaker 1: going to see significant impact there. I wonder if you
Speaker 1: could describe what exactly you would buy and or sell
Speaker 1: in order to counteract this event that may happen. Sure,
Speaker 1: that's actually a question that's better asked to our clients,
Speaker 1: as we are essentially a framework provider and a tool
Speaker 1: provider allows people to do the analysis of their portfolios.
Speaker 1: So our philosophy is we provide the tools and the
Speaker 1: clients who have the portfolios can analyze their portfolios themselves
Speaker 1: and decide what's the best approach to run with Our
Speaker 1: thinking here is that most likely it would be equity
Speaker 1: related portfolios that would take the biggest hit. Currency exposure
Speaker 1: would be we put in say temper sent drop of
Speaker 1: the pound version dollars I would be more middle level,
Speaker 1: and we felt that a shock to the interest rates
Speaker 1: and the sovereign curves in Europe would be relatively muted
Speaker 1: under scenario. Again, it's just a scenario that we're considering.
Speaker 1: That was our order of magnitude. So obviously if you
Speaker 1: have this type of portfolio, as you'd look to reduce
Speaker 1: your equity risk. That's interesting to me because we've had
Speaker 1: this screaming bond rally around the world. Not granted it's
Speaker 1: been going on for a while, but it really picked
Speaker 1: up steam. It has really felt the last week or
Speaker 1: so like a lot of people were trading off of
Speaker 1: Brexit headlines and the growing risk that the ukse citizenry
Speaker 1: will vote to leave the European Union. But you're saying
Speaker 1: your models suggests that the fixed income the bonds have
Speaker 1: the very least impact and very little at all potentially
Speaker 1: from this particular scenario. Well, I should be clear hair
Speaker 1: that's our input as the stress test, So you could
Speaker 1: definitely do another stress test where you see much greater
Speaker 1: drop uh, in the bond prices or vice urs, you
Speaker 1: could see an actual tightening of the yields. So when
Speaker 1: we're doing this analysis, it's really stress test basis, and
Speaker 1: that's where the expertise of the risk manager is using
Speaker 1: this kind of tool needs to come in to express
Speaker 1: their views and test out their ideas. Bill, I'm wondering
Speaker 1: if the UK decides to leave the European Union and
Speaker 1: the pound sterling falls in value, would that not help
Speaker 1: British manufacturing companies or companies in Britain be more competitive
Speaker 1: and therefore their stocks might actually do well. Definitely. In fact,
Speaker 1: we there's a historical precedent for that during Black Wednesday
Speaker 1: when over the full of the pounds fell by about
Speaker 1: but simultaneously there was an equity rally. So that's another
Speaker 1: stress that's that you might run and it's quite plausible. Again,
Speaker 1: nobody knows what's really going to happen, so it's best
Speaker 1: to take your portfolio, express your views and have a
Speaker 1: tool that captures it across the multi astic class portfolio
Speaker 1: and is able to capture all those various correlations and
Speaker 1: let you express your ideas as you would like to.
Speaker 1: Bill Morocoffee is the head of research at Axioma. Thank
Speaker 1: you very much for being with us right now. Taking
Speaker 1: a look at the dollar trading against the British pounds sterling,
Speaker 1: we're up one and a quarter percent, the pounds strengthening
Speaker 1: against the green back, up about one and a quarter
Speaker 1: percent at one point four three seven nine. And today
Speaker 1: the foot See index in London gains seventy points. It
Speaker 1: is down three and a half percent year to date.
Speaker 1: You're listening to Taking Stock on Bloomberg Radio following birth
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