Figure 1: Rolling Asset Betas (2-years of daily data)
EE calculations based on Bloomberg data.
The “beta” of an asset tells us how the riskiness of that asset changes relative to the sum of all assets in the economy. Therefore, for a given equity sector, an increase in beta is interpreted as an increase in its risk relative to the equity market as whole. As noted in our previous newsletters, the general trend since 2014 has been a steady increase of the beta of relatively safe assets (e.g. utilities), and a decrease of betas of sectors perceived to be riskier (e.g. financials). In particular, the financials sector appears to be diverging from the other main equities sectors in moving to lower risk relative to the pack. We have interpreted this as a sign of potential normalisation of financial markets and a move away from “flight to safety” effects.
Since June 2015 financial markets have been subjects to at least two relevant events. The deterioration and subsequent resolution — at least temporarily — of the Greek crisis and, more recently, the sharp sell-off in equity markets across the globe amid fears of a slowdown in Chinese growth. It is of interest to notice that, despite these developments, the overall trend trajectory and momentum of UK equity beta have remained perfectly intact.