Axioma Risk Monitor
Equity edition

Emerging Markets gain appeal; Illiquid stocks plummet in Emerging Markets; Emerging currencies fare better than developed

This week we are excited to introduce our new Emerging Markets Equity Risk Model (EM4) into the EM Risk Monitor. For more details on this new model click here.



Emerging Markets gain appeal


Internal politics in a number of emerging countries along with the US-China dispute have put pressure on emerging market stocks, but the FTSE Emerging Markets index was nevertheless able to record small gains for the past week and month. The small advances were in stark contrast with the steep losses over the past three and six months. However, both gains and losses were within one standard deviation of the expectations at the beginning of each of these four periods, as measured by Axioma’s short-horizon new Emerging Markets model. The short-horizon risk of Emerging Markets rose about 20 basis points last week, while that of Developed Markets was up about 40 basis points. While Developed Market risk has been increasing at a faster pace than that of Emerging Markets, it remains lower. Emerging Markets’ short-horizon risk of 19% was more than four percentage points higher than that of its developed counterpart. The FTSE Emerging Index is now about 30% riskier than FTSE Developed Markets, down from 86% riskier at the beginning of October.

See graph from the Emerging Markets Equity Risk Monitor as of 29 November 2018:


Illiquid stocks plummet in Emerging Markets


Illiquid stocks plummeted in Emerging Markets over the past six months. In fact, the Liquidity style factor seemed to be a bigger driver of losses than other factors, more typically associated with high negative or positive returns. While illiquid stocks have been doing poorly in most geographies Axioma tracks closely, Liquidity in the Emerging Market model last week registered the largest negative six-month cumulative return among all style factors in the model at -6.73%. In other words, stocks with low liquidity underperformed strongly around the world, particularly in Emerging Markets. Investors may find that a small liquidity exposure, either positive or negative, has had an outsized and unexpected influence on recent returns.

See graph from the Emerging Market Equity Risk Monitor as of 29 November 2018:



Emerging currencies fare better than developed


While the US dollar declined slightly after the Fed suggested last week that rate hikes may slow, both developed and emerging currencies weakened severely in the past six months. All major developed currencies recorded losses greater than -2%. However, in emerging markets, there were a few currencies that recorded positive six-month returns against the US dollar, namely the Egyptian pound, Mexican peso, Philippine peso and Brazilian real. Unsurprisingly, most emerging currencies have been more volatile than developed currencies. The Turkish lira remains by far the riskiest of major emerging market currencies, followed by the South African rand and Brazilian real, as revealed by Axioma’s Emerging Market model.

See graph from the Emerging Markets Equity Risk Monitor as of 29 November 2018:



Stay Connected


Webinar | Axioma Insight™ 2018 Risk Review

December 12, 2018 | 11:00 AM ET / 4:00 PM GMT

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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