Axioma Risk Monitor
Equity edition

Large Cap stocks finish strong despite recent downfall; Info Tech wipes out most of early 2018 gains; Developed country risk on the rise




Large Cap stocks finish strong despite recent downturn


Large capitalization stocks regained strength in the second half of the year, after losing ground against their smaller counterparts in the first half. The Size factor’s six-month cumulative return was positive in all of Axioma’s medium-horizon fundamental models as of last Thursday, but the Canadian one, despite the decline recorded by most models recently. In most regions, Size’s six-month return was at least two standard deviations above its long-term average (and was an almost-six-standard deviation event for US Small Cap). Large caps in Asia Pacific ex-Japan performed the best across regions, recording the highest six-month cumulative return of 7%, for a staggering yearly return of 14%. The second and third top yearly performers were China (9%) and Emerging Markets (8%). Size posted negative cumulative yearly returns in both US models, US4 and US Small Cap, ending 2018 at -0.2% and -1%, respectively. The strong large cap returns, which ran counter to the small cap effect many likely expected, may have had an unusually large and unexpected impact on portfolio returns in the second half of 2018.

See graph from the Asia Pacific ex-Japan Equity Risk Monitor as of 3 January 2019:


Info Tech wipes out most of early 2018 gains


Info Tech recorded steep losses in the fourth quarter. Although the sector finished the year with small gains, it is likely little comfort to Technology investors. All sectors in the Russell 1000, except Utilities, recorded negative returns in Q4, with Energy, Industrials and Information Technology the biggest losers. However, the rally in tech stocks in first three quarters of 2018 helped the Information Technology sector, which still posted positive cumulative returns (of 3%) for the year. Info Tech was among the four sectors that did not finish the year in the red, next to Consumer Discretionary, Utilities, and Health Care. Energy finished 2018 much like it did last year, as the worst performer and the riskiest sector.

Risk rose for all sectors, more than doubling the level recorded at the beginning of the year for Consumer Discretionary, Health Care, Industrials, Information Technology, Materials and Communication Services. Consumer Staples remained the least risky sector throughout the year.

Info Tech’s risk climbed to nearly 24% by December 31st, finishing 2018 as the second most risky sector after Energy (26%). Info Tech was also the largest contributor to benchmark risk (nearing 25%), its contribution far exceeding its weight of about 20% in the Russell 1000 at year end. The gap between Info Tech’s contribution to risk and weight in the Russell 1000 rose for much of 2018 and peaked in September.

See graph from the US Equity Risk Monitor as of 3 January 2019:



Developed country risk on the rise


Developed country risk ascended in the fourth quarter, as total equity risk of aggregate developed markets surged over the same period. Market risk was the major driver of the increase in total risk and by last Thursday, FTSE Developed forecasted volatility exceeded 15%, as measured by Axioma’s medium-horizon fundamental risk model. A look at the major components of risk in the index showed that country risk increased by more than 30% since the end of September. In contrast, currency risk declined during this period, while the other components of risk—style, stock-specific, and industry risks (which are only a small part of total benchmark risk)—have been relatively flat. Therefore, a given country bet has likely become more risky and the tracking error of portfolios making those bets has likely increased.

See graph from the Developed Markets Equity Risk Monitor as of 3 January 2019:



Stay Connected


Webinar | Look Back, Look Ahead: Q4 2018 Risk Review

January 9, 2018 | 11:00 AM ET / 4:00 PM GMT

In this webinar, Melissa R. Brown, Managing Director of Applied Research, will review the risk environment during 2018, paying particular attention to the fourth quarter. She will focus on aspects of risk that changed the most, driving the necessity for investors and risk managers to be even more vigilant.

Register here.

Webinar | Axioma Insight™ Q4 2018 Risk Review, APAC & Outlook for 2019

January 10, 2018 | 10:00 AM HKT / 11:00 AM JST

In this webinar Olivier d’Assier will identify the key drivers of market risk in Q4 and touch upon what 2019 may bring.

Register here.


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