Axioma Risk Monitor
Equity edition

Short-horizon risk spread widens in the UK; Japan’s market risk rises as its economy contracts; Style risk plummets in China while total risk soars




Short-horizon risk spread widens in the UK


On the heels of significant gains over the past three months, risk of the UK market rose modestly last week, despite Brexit-related turbulence following the resignation of several members of the UK government. However, the spread between short-horizon statistical and fundamental forecasts for the FTSE 350 widened. Positive risk spreads can indicate extra risk picked up by the statistical models that may reflect potential changes in the risk regime and/or the emergence of non-traditional factor risk sources. UK short-horizon statistical forecasts have exceeded their fundamental counterparts since the beginning of October, with the spread reaching 0.5% last week. In contrast, the UK medium-horizon statistical and fundamental models were largely in agreement, with the fundamental medium-horizon forecast still remaining slightly above its statistical counterpart last week.

At the same time, the British pound was severely battered by the political events of last week, dropping about 1.6% against the US dollar. The pound was among the biggest losers against the greenback compared with other developed currencies, recording a loss of more than 5% over the past six-months. The British currency also ended the week as the second-riskiest developed currency, after the Swedish krona, and the pound was positioned near the high-end of its six-month volatility range against the US dollar by last Thursday. The pound has been one of the riskiest developed currencies since the Brexit vote in June 2016. For insights on the possible effects of a further significant depreciation of the pound’s value on a global multi-asset class portfolio, see blog post, "Preparing for a cliff-edge Brexit".

See graphs from the UK Equity Risk Monitor as of 15 November 2018:


Japan’s market risk rises as its economy contracts


The Japanese stock market recorded losses and its risk rose, as Japan’s economy contracted in the third quarter, mainly due to a series of natural disasters, although trade issues also weighed in. The Risk Watch graph showed risk/return arrows turning clockwise, indicating an increase of the FTSE Japan’s risk and negative total returns over the past month, three months and six months. Market losses remained within one standard deviation of the expectations at the beginning of last week and at the three time-horizons mentioned earlier. Despite a 20-basis point decline in risk over the past five days, short-horizon risk for the FTSE Japan rose 500 basis points over the past three months, for a total of 512 basis points in the last six months, as measured by Axioma’s US short-horizon fundamental model. Japan’s six-month surge in risk is the highest among the developed regions Axioma tracks closely, with the short-horizon risk forecast reaching 18.4% last Thursday.

See graph from the Japan Equity Risk Monitor as of 15 November 2018:



Style risk plummets in China as total risk soars


Style risk dipped to a six-month low last week, dropping about 170 basis points from the August high of 2.4%. Aggregate Style risk was 0.7% last Thursday, as measured by the medium-horizon forecast of Axioma’s China model. In contrast, total risk for the CSI 300 soared, climbing about 7 percentage points since June. Looking at the major components of risk, industry risk was the driver of the increase. Style risk and stock-specific risk, which are only a small part of the benchmark risk, both declined over the past couple months, although stock-specific risk did so at a much slower pace.

See graph from the China Equity Risk Monitor as of 15 November 2018:



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