US Jobs Report, Rate Cuts, Geopolitical Risk, and Equity Market Returns: What Risk Factors are Dispositive?

Given that it seems to be ‘the best of all possible worlds’ for the time being, the new “no landing” scenario – where the US economy continues to expand, inflation returns a little, and the Fed has limited room for further easing – generated by the solid US jobs report, seems to be coloring the equity markets this morning.

While perhaps not the best news for some emerging and frontier markets, some selectivity in allocation might therefore be warranted, especially when geopolitical risk can help shape returns.

In a recent piece in the Journal of Emerging Market Finance, the research carves out four ‘principal components’ of our ICRG data series and assesses their impact on equity prices for 28 developed and emerging market countries from 2001 to 2015.

Among the findings: ICRG’s ‘Government Stability’ risk metric produces a negative hedge in the all-country sample.  ‘Socio-economic conditions’ produces the highest positive hedge return.  ‘Ethnic’ and ‘Religious Tensions’ contribute a positive hedge return of 5.6% p.a, of which 6.7% p.a. is related to emerging markets.  A similar trend is detected for ‘Religious Tensions.’

Good material.  Have a look when time permits.

(https://lnkd.in/dfhD6WQU)

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