Volatility and correlations loosen their grip

Volatility and correlations are finally easing around the globe. The latest charts of global volatility and correlation hotspots were peppered with downward arrows, reflecting sharp decreases in volatility and correlations at the individual country level. Axioma’s Worldwide short-horizon fundamental model showed that volatility fell more than one percentage point, while correlations declined by more than two percentage points last week in a number of countries, particularly in Europe, Asia and South America. The decrease in both components of risk suggests that managers should take a particularly close look at the active risk of their portfolios, with a focus on the sources of the largest changes.

See graph from the Equity Risk Monitors as of 31 January 2019:

Wide dispersion accompanies developed markets recovery

Asset dispersion remained relatively wide for FTSE Developed Markets last week, as stocks ended January with gains. Winners dominated losers over the past five weeks, in stark contrast with the prior five weeks. FTSE Developed Markets recorded a cumulative monthly gain of 8% in January, while risk for the index increased about 10 basis points over the same period. FTSE Developed Markets’ short-horizon risk exceeded 18% last Thursday, as measured by Axioma’s US short-horizon fundamental model. Dispersion, the cross-sectional standard deviation of weekly returns, remained relatively wide in the FTSE Developed Markets since the beginning of January, an indication of more opportunity for active managers to add value in Developed Markets.

See graph from the Developed Markets Equity Risk Monitor as of 31 January 2019:

US Momentum decouples from peers

Currently, US Medium-Term Momentum’s correlations with most other style factors in Axioma’s US4 medium-horizon model are negative. Momentum and Value recorded the largest negative correlation (-0.36) among US style-factor pairs as of last Thursday, suggesting that Value stocks lack momentum, and that high Momentum stocks do not necessarily offer good value. In contrast, Momentum’s correlation with Growth was the highest at 0.39 points. The only other factors showing positive correlations (albeit of small magnitude) with Momentum were: Size (0.12) and MidCap (0.03). Since the beginning of the year, Momentum’s correlation with Value, Leverage, Dividend Yield, Liquidity, Market Sensitivity and Volatility became more negative. Investors tilting their portfolios on multiple style factors may see a big and unexpected impact on their portfolio risk due to changing factor correlations.

See graph from the US Equity Risk Monitor as of 31 January 2019: