Axioma Risk Monitor
Equity edition

Risk remains high, buoying volatility; Japan and Italy lead in Developed-Market risk, China in Emerging Markets; Momentum underperforms, as geopolitical events loom




Risk remains high, buoying volatility


Risk remained elevated last week in all the markets Axioma tracks closely and all without exception continued to have a positive risk-spread between their short-horizon (higher) and medium-horizon (lower) model variants, signaling that for at least the near-term, volatility should remain high. The UK even had a positive risk spread between its two short-horizon models, where the statistical variant seems to be capturing some of hard Brexit risk over and above the risk captured by the fundamental model.

See graph from the US Equity Risk Monitor as of 23 November 2018:

On the positive side for active managers, the average pairwise asset-to-asset correlation continued to decline after surging during October’s flight-to-safety. This decline was particularly evident in Japan (see below), but all markets experienced lower correlation last week, which will have helped to lower Active Risk, especially for high-conviction concentrated portfolios.

See graph from the Japan Equity Risk Monitor as of 22 November 2018:


Japan and Italy lead in Developed-Market risk, China in Emerging Markets


For global (developed) investors, country risk is once again a major source of differentiation, with Japan and Italy in second and third place, respectively, behind only Iceland on this metric. Next comes Portugal and Hong Kong (proximity to China) in terms of country risk. Note that this measure of risk is over-and-above that of global developed markets and other factors comprising the Developed Market model, what we often call “extra-market” risk. For Emerging Markets, risk continues to be driven by China, whose contribution to the portfolio risk far outweighs its weight in the FTSE Emerging Markets index.

See graph from the Developed Markets Equity Risk Monitor as of 23 November 2018:



Momentum underperforms, as geopolitical events loom


For style factors, market sensitivity (i.e., high beta stocks) and momentum (i.e., high momentum) continued to perform poorly this week, as investors seemed to lack conviction ahead of three critical geopolitical events in the coming weeks (i.e., the Brexit plan vote in the UK, the Trump-Xi meeting on the sideline of the G-20 meeting, and the Fed rate decision in December).

See graph from the Developed Markets Equity Risk Monitor as of 23 November 2018:



Stay Connected


Webinar | Axioma Insight™ 2018 Risk Review

In this webinar, Melissa R. Brown, Managing Director of Applied Research, will discuss the major themes driving risk across markets in 2018, and do a deeper dive into factor returns that likely impacted portfolios.

Register here.


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