The cornerstone of investing is risk, natch. But among the lurking perils out there, which is the one that financial professionals worry about the most? That would be market risk, according to a new Bloomberg survey of risk experts at financial institutions.
As No. 1 on the risk parade, the chance of a bad market leads the rest at 39%. For second place, respondents (31%) named credit risk. Liquidity risk was in third, at 24%, and climate risk came in last, at 5%.
Market risk, the survey said, had received top billing as a threat due to recent interest rates hikes, rising inflation, faster volatility and widening spreads. Both the stock and bond markets have tanked, an unusual double dip.
What risk indicators have been the most helpful to respondents recently? The best: credit default swaps, which help when rates are erratic, ascending these days and may yet reverse their path. News is the next indicator, as headline risk is ever-present. These two methods are “quick to capture the impact of market events but can be noisy,” the study noted.
The best way to gird yourself for risk is to assess it minutely, Bloomberg’s risk unit believes. ”To proactively manage credit risk, firms need a surveillance framework across a broad range of factors, and technology has a key role to play—especially when it comes to turning noisy market factors into meaningful signals,” said Zane Van Dusen, global head of risk and investment analytics products at Bloomberg, in a statement.
“Market participants are usually aware of potential credit issues ahead of any rating changes,” Van Dusen said in the release. “With the right technology and data, risk managers can anticipate downgrades and credit defaults at scale.”
With worries about liquidity rife, owing to market turbulence, the best antidote (picked by 34% of respondents) is to look for different ways to analyze the situation, presumably because there are so many new factors affecting results nowadays (pandemic, war in Europe, high inflation, etc.). A full 29% said they would make no changes to their approaches to measure their risks. This group, the study indicated, “may be riding out the storm and waiting to see how their current systems perform.”
As for climate risk, lowest on the agenda, a full 90% of all respondents stated that they are making it part of their analyses: “indicating it continues to be something that firms are closely watching.”