By: Mat Lystra, Sr. Research Analyst
Despite setting the pace with one of the most successful post-financial crisis expansions in the world, U.S. equities could not escape being dragged down from behind during the third quarter. Uncertainty in China and instability in Europe sent investors running for cover. Particularly hard-hit were market segments that investors viewed as being riskier, which can be observed by looking at the beta of Russell benchmarks covering size, style and stability.
The beta coefficient for a stock or market segment can be viewed as its systematic volatility (a proxy for risk) as compared to the market overall (for our purposes the market is represented by the Russell 3000 Index). A beta greater than 1.0 indicates the potential for more volatility/risk than the market, while a beta less than 1.0 indicates potentially less relative volatility/risk. As seen in the chart above, across the three dimensions of risk premia measured by Russell indexes’ size, style and stability benchmarks; higher beta equaled lower return.
One important factor to note is the China effect. Some argue that for the first time in modern history, the country exported not just goods but volatility from its stock market to the rest of the world in the third quarter. China has been generally adept at finding the “Goldilocks” way of not too hot, not too cold, in its market stimulus and reforms. But the combination of a slowed economy, fears over unsustainable prices in the stock market, and a devaluation of the Renminbi exerted enough pressure to break the chair in the third quarter. The FTSE Russell Quarterly Small Cap Perspectives report reviews the events in China that impacted global markets in a way that suggest the “Chinese wall“ no longer exists.
FTSE Russell's Quarterly Small Cap Perspectives report further explores the inverse relationship between beta and performance that dominated the third quarter.
 Z-Ben Advisers. (2015). Volatility – China’s New Export. Summary report retrieved at: http://www.z-ben.com/edm/Public/file/Strategic%20Outlook-%20Integrating,%20Not%20Emerging%20-%20Part%20II.pdf
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