US Markets continue to rise as risk ticks up; Momentum excels globally, except in China; Loonie surges against the greenback

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Individual country risks reshuffled following turbulent weeks; US small-cap risk rises less than large-cap; Momentum shines in Emerging Markets




Individual country risks reshuffled following turbulent weeks


Markets rebounded somewhat from the market downturn a couple of weeks ago, but the relative riskiness of individual countries shifted dramatically. At the end of January, major developed countries were clustered together, with volatilities of between 6.5% and 11%, and a good distance from the riskiest country among both developed and emerging markets—Chile at 19%. After the recent shake-up, most developed countries’ risk increased, spreading from 9% to 14.5%, as measured by Axioma’s short-horizon fundamental Worldwide model last Friday.

The US moved from being one of the least risky developed countries, to becoming the sixth riskiest. Japan, Italy, Portugal, Ireland and Austria were still in top five last week, but Japan and Italy took Portugal’s place as the riskiest developed countries. New Zealand, Singapore and Australia were the least volatile developed countries last week. Greece and China’s 18% volatility pushed them in the lead and Malaysia (8%) became the least risky, among both developed and emerging countries.

See graphs from the Equity Risk Monitors as of 16 February 2018:



US small-cap risk rises less than large-cap


While both small and large caps experienced heightened volatility, small caps became strikingly less risky than their large cap counterparts, as revealed by Axioma’s US4 fundamental model. Forecasted short-horizon risk for the Russell 2000 jumped a substantial 380 basis points in February, while that for the Russell 1000 increased a staggering 540 basis points over the same period. The medium-horizon variant of the US4 model showed a similar pattern, with medium-horizon forecasts rising 330 and 220 basis points for the Russell 1000 and Russell 2000, respectively, this month.

The ratio between Russell 2000 and Russell 1000 short-horizon risk forecasts reached a decade high of 1.8 in May 2017, while the ratio of the medium-horizon forecasts rose to its decade-high of 1.7 in June 2018. The two ratios dropped abruptly since December of last year, and by the end of last week, the short-horizon ratio had dipped to a two-year low of 1.1, while the ratio of the medium-horizon forecasts lowered to 1.2. These levels of relative risk are also approaching 11-year lows.

The chart below does not appear in our Equity Risk Monitors, but can be provided upon request:



Momentum shines in Emerging Markets


Medium-Term Momentum’s return was not much affected by the most recent market gyrations – a somewhat surprising turn of events, as big market turnarounds are typically accompanied by poor performance of Momentum. The style factor recorded strong positive returns at the one-week, one-month, three-month and six-month horizons in all regions Axioma tracks closely, as of last Friday. The only exception was Canada, where Momentum’s three-month return was a modest -0.28%. Emerging Markets saw the highest six-month return for Momentum of 5.73%, while the UK recorded the lowest one of 1.15%.

In the US, Momentum was the third best performer over the past six months, after Size and Market Sensitivity, among the style factors in the US4 medium-term fundamental model. For more details on US Momentum’s performance during the intense market downturn in the beginning of February, see “Factoring in Volatility” blog post.

See graph from the Emerging Markets Equity Risk Monitor as of 16 February 2018:



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Reverse Stress Testing Challenges: Toward a Systematic Framework

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In Axioma's webinar, Olivier d'Assier, Head of Applied Research, APAC, discussed the current risk environment and how it might be impacting investor portfolios in APAC. View the recording here.

Recording | Q4 Insights: Look Back, Look Ahead

In Axioma's webinar, Melissa R. Brown, Managing Director of Applied Research, discussed the current risk environment and how it might be impacting investor portfolios. She reviewed the major drivers of risk during the past quarter and year, including country, currency, industry and style risk. Other topics included style factor performance and correlations across factors, individual assets and asset classes. View the recording here.


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